\There are few Coffee Can Investors, to begin with at least. Invest a lump sum amount and forget about the investment. They would not be interested in following the price of the asset on daily basis.
The second type of people has a very fundamentally traditional question among the investors. What is the best time to invest in the stock market.? The question is not so complex to answer but complex to follow and implement. The answer to this simple question is when the stock market is in at the bottom.
When does the bottom really come and how do you determine that this is bottom.
What is Rupee Cost Averaging?
Majority stock trader would wonder that averaging is the worst thing to do. Yes! they are right when it comes to trading. Perhaps not when it comes to investing for a long-term horizon.
The funda of timing the market is usually for stock traders.
Investing especially for long-term investors are not interested in timing the market.
Everyone wants to invest in the stock market when it is at the bottom. The irony is that no ones know when this bottom arrives. Likewise, the other way around also works when the stock market is at peak every investor wants to get out of the stock market. But again, it is very tough to ascertain when it is the peak.
Law of Demand
If you can recall the economics chapter of the law of demand and supply. This best explains the concept of rupee cost average functions.
The definition as explained in Wikipedia, “In microeconomics, the law of demand states that “conditional on all else being equal, as the price of a good increases (↑), quantity demanded decreases (↓); conversely, as the price of a good decreases (↓), quantity demanded increases (↑)”.
Law of Demand coupled with discipline creates value cost averaging.
In a search to find a golden rule to catch the market low and profit from its peak, many investors have lost money in the stock market. There is no one can accurately peaks and bottoms. This is what created rupee cost averaging which works on the basis of the law of demand.
That’s how the popularity of Systematic Investment Plan aka SIP gained popularity. This works on the principle of rupee cost averaging. Rupee costs averaging means that you invest regularly (monthly) the same amount. When the price of the stock falls down you automatically get the stock at a lower price. You accumulate the units of the stocks or funds at various prices. When the price is the lowest you get an opportunity to get the highest units.
As the SIP advances and when the price reaches the peak, you would have invested through all the market phases.
As told by Suresh Sadagopan (Founder of Ladder7 Financial Advisories) to Moneycontrol, as investors what we normally tend to do is that we tend to invest when the markets are going up and we tend to clam up when the markets are coming down.
There is no magical aspect of rupee cost averaging. It is more a psychological concept than the financial concept. The human nature works like how Mr. Suresh Sadagopan explained. SIP detach yourself from being attached to the stock investment process and in the process works like rupee cost averaging to give you better returns in the stock market.
Over To You
If you are not astounded fundamental or a technical analyst and you want to enter the stock market then rupee cost averaging is the best method, in other words, Systematic Investment Plan (SIP).
If you want to beat inflation and grow your wealth then in rupee cost averaging works in your favor.
Start investing with zero charges and zero brokerage account in mutual fund and the stock market.
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