Rupee Cost Averaging

Q: Does RCA always beat lumpsum investing?

No. Mathematically, if markets rise steadily, a lumpsum invested at start beats RCA. RCA outperforms in volatile and falling markets. Since no one knows which way markets go, RCA via SIP is the practical, consistent approach that suits most investors.

Full form: RCA

Investments

Rupee Cost Averaging is the investment strategy of investing a fixed amount at regular intervals regardless of market price. SIP is the practical implementation of RCA. When prices fall, more units are bought; when prices rise, fewer units. The average cost per unit is lower than the average price over the period.

In detail

Mathematical proof:nIf NAV goes: Rs 100, Rs 80, Rs 60, Rs 80, Rs 100nFixed Rs 10,000 per period: Units bought = 100 + 125 + 166.7 + 125 + 100 = 616.7 unitsnAverage NAV over period = Rs 84nAverage cost per unit = Rs 50,000 / 616.7 = Rs 81.07nRCA gives Rs 81.07 vs Rs 84 average price -- saving Rs 2.93 per unit due to buying more at lower prices

Formula

Average cost per unit = Total invested / Total units purchasednThis is always <= Arithmetic mean of prices when fixed amount invested

Real-life example

🇮🇳 India example

Priya: Rs 5,000/month SIP. Market falls 30% in months 3-6. She continues. Her SIP automatically buys 43% more units in those months than in normal months. When market recovers, those extra units amplify her gains. She ends up with more units than if market had been flat throughout.

Frequently asked questions

Does RCA always beat lumpsum investing? ▼

No. Mathematically, if markets rise steadily, a lumpsum invested at start beats RCA. RCA outperforms in volatile and falling markets. Since no one knows which way markets go, RCA via SIP is the practical, consistent approach that suits most investors.