The Indian benchmark indices - Nifty 50 and Sensex - had dropped approximately 15% from their lifetime highs in recent weeks, with broader markets taking an even bigger hit.
### What’s causing this decline?
Two key factors: heavy selling by Foreign Institutional Investors (FIIs) and uncertainties due to global trade tensions. The selling pressure was compounded by mixed corporate earnings performance and an overall cyclical economic slowdown.
Amid this gloomy landscape, many new investors who entered the Indian stock market are feeling the heat. However, for long-term investors, downturns like these present a golden opportunity. As Warren Buffett famously said, _“The stock market is a device for transferring money from the impatient to the patient.”_
This is the time for investors to accumulate fundamentally strong businesses at reasonable valuations.
### How can investors capitalize?
Enter the ‘rupee cost averaging (RCA) approach —a powerful investment strategy that enables investors, including NRIs, to navigate market volatility efficiently.
Rupee Cost Averaging is a disciplined approach where you invest a fixed amount at regular intervals, irrespective of market conditions. The fundamental principle is simple: when prices are low, you buy more units; when prices are high, you buy fewer units.
Over time, this strategy smoothens market fluctuations and reduces the average cost per unit.
Imagine you decide to invest Rs20,000 every month in an equity fund through a Systematic Investment Plan (SIP):
* Month 1: NAV is Rs50 and you get 400 units.
* Month 2: NAV drops to Rs40 and you pick up 500 units.
* Month 3: NAV rises to Rs60 and you get 333 units.
By the end of three months, you've invested Rs60,000 and accumulated 1,233 units.
Had you invested the entire amount as a lump sum at the beginning, you would have purchased fewer units at a higher price. Instead, Rupee Cost Averaging ensures that your investment cost averages out over time, helping you turn market volatility into an advantage rather than a risk.
### Idea behind the strategy
The Rupee Cost Averaging works because it eliminates the emotional aspect of investing. Many investors panic during market downturns and pull out investments, locking in losses. The RCA, however, enforces discipline by keeping investments consistent, whether the market is rising or falling.
For NRIs, who may not always have the bandwidth to track market movements actively, this strategy offers a convenient way to build wealth steadily over time.
### Hidden power of consistency
The key to making RCA work is consistency. A market downturn can feel unsettling, but continuing to invest during these periods allows you to buy more units at discounted prices. Over the long run, as markets recover and grow, the accumulated units appreciate in value, leading to significant wealth creation.
John Bogle, founder of Vanguard, emphasized long-term investing over market timing, advocating for staying invested rather than trying to predict short-term movements.
We all know that market downturns are inevitable, but they don’t have to be a reason to panic. For NRI investors looking for a systematic, stress-free way to invest, the rupee cost averaging offers an effective solution.
By investing consistently through an SIP, you can ride out market volatility, reduce the average cost of investment, and build long-term wealth.
The best investors know that wealth is created not by reacting to short-term market fluctuations but by staying the course. As Peter Lynch once said, _“Far more money has been lost by investors preparing for corrections, or trying to anticipate corrections, than has been lost in corrections themselves.”_
So, rather than trying to predict the market’s movements, focus on staying invested and letting the power of compounding work in your favor.
_The writer is Chief Business Officer, Life Insurance at Policybazaar._
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