Hi Friends,
Today I shall discuss how one should take advantage of a falling market. The concept is pretty simple. It is known as rupee cost averaging.
We often hear people saying something like "Today I bought 1000 shares of Reliance@ 800. It has already come down from 1200 to 800 and it can't go down any further." Now timing the market is foolish, time consuming and almost impossible. Timing the market is an area where most investors are prone to go wrong.
Under rupee cost averaging one does not have to worry when and how much to invest. Periodic investing is done irrespective of the market conditions. Let us assume that a person had Rs 10000 today and he wanted to invest in a company A which is trading at Rs 20. He would have been able to buy 500 shares. (Scenario 1)
Instead of one time purchase if the same person were to invest Rs 1000 per month for the next 10 months, the scenario would be something like:-(Scenario 2)
Time(mths) Fixed amt invested Price per share Shares Purchased
1 1000 20 50
2 1000 21 48
3 1000 24 42
4 1000 19 53
5 1000 16 63
6 1000 17 59
7 1000 14 71
8 1000 23 43
9 1000 18 56
10 1000 22 45
Total 10,000 18.86 530
Thus we see that in case of Scenario 2, he has purchased 30 more shares than Scenario 1 and that too at a lower cost i.e. 18.86 vis-a-vis 20. Plus the worrying bit was not there.
P.S: This should be done with a great company. If rupee cost averaging is done in case of a stock like SKS Microfinance or Koutons, you will keep on averaging and you will start posting negative feedback on my blog.
Hope this helps,
Vivek
Today I shall discuss how one should take advantage of a falling market. The concept is pretty simple. It is known as rupee cost averaging.
We often hear people saying something like "Today I bought 1000 shares of Reliance@ 800. It has already come down from 1200 to 800 and it can't go down any further." Now timing the market is foolish, time consuming and almost impossible. Timing the market is an area where most investors are prone to go wrong.
Under rupee cost averaging one does not have to worry when and how much to invest. Periodic investing is done irrespective of the market conditions. Let us assume that a person had Rs 10000 today and he wanted to invest in a company A which is trading at Rs 20. He would have been able to buy 500 shares. (Scenario 1)
Instead of one time purchase if the same person were to invest Rs 1000 per month for the next 10 months, the scenario would be something like:-(Scenario 2)
Time(mths) Fixed amt invested Price per share Shares Purchased
1 1000 20 50
2 1000 21 48
3 1000 24 42
4 1000 19 53
5 1000 16 63
6 1000 17 59
7 1000 14 71
8 1000 23 43
9 1000 18 56
10 1000 22 45
Total 10,000 18.86 530
Thus we see that in case of Scenario 2, he has purchased 30 more shares than Scenario 1 and that too at a lower cost i.e. 18.86 vis-a-vis 20. Plus the worrying bit was not there.
P.S: This should be done with a great company. If rupee cost averaging is done in case of a stock like SKS Microfinance or Koutons, you will keep on averaging and you will start posting negative feedback on my blog.
Hope this helps,
Vivek
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