Home Finance Rupee Cost Averaging (RCA) Vs Value Investing: The Better Bid

Rupee Cost Averaging (RCA) Vs Value Investing: The Better Bid

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There are so many investment options that people often get confused about where to invest and how to invest. Let us look at two common investment techniques, their advantages and their disadvantages. By the end of this article, you will know the answer to the question – What is the difference between RCA and VA? And, which is better, RCA or VA?

RCA (Rupee Cost Averaging)

Speculation about the best time to invest is common among investors. However, it is well-known that no one can forecast whether the market will move up or down. The response to such a situation has been Rupee Cost Averaging. It is also known as SIP (Systematic Investment Plan) in Mutual Funds.

Investors use RCA to invest a certain amount at regular intervals, regardless of the investments share (unit) price. Regular investment allows investors to profit from market declines without having to worry about when they will occur. When the price is low, their money buys more units, and when the price is high, it buys fewer, resulting in a reduced average cost per unit over time.

Advantages:

·      Removes the need for market timing. Investors don’t have to put in extra effort to figure out the optimum moment to invest and redeem.

  • Investors get paid every month and save every month.

Disadvantages:

·      This is a double-edged sword. It could be advantageous for a newbie or someone who has a passive adviser. It tends to be unfavorable for experienced investors who have access to advanced algorithms that they may use to generate alpha over SIP investment mode in mutual funds.

  • SIPs won’t help investors avoid large negative returns if they don’t have the appropriate asset allocation.
  • SIP only works if it is followed continuously over a period of time. It is doubtful that a 6- or 12-month SIP in equity mutual funds would help investors.

VA (Value Averaging)

Value averaging is a time-consuming method of investing. The amount of investment is not fixed; it fluctuates according to market conditions. This is an upward strategy in which investors set long-term portfolio targets.

A long-term goal is essentially a value path. As a result, investors may manage the growth of their portfolio by adding or subtracting only the amount necessary to reach their goal.

Advantages:

  • Investors who follow the value averaging principle will almost certainly meet their financial objective by the deadline.
  • It allows investors to purchase more when prices are low and sell more when prices are high.

Disadvantages:

  • The strategy may be effective in volatile markets, but it is ineffective in more stable markets, bull markets, or extended bear markets.
  • VA might not be an option for investors looking to invest for 15-20 years, as it may cause a lack of discipline.

Rupee Cost Averaging vs Value Averaging (RCS vs VA)

Rupee Cost Averaging

MonthNAVAmount InvestedUnits purchasedNet Units
Jan10Rs. 1,000100100
Feb12Rs. 1,00083.33183.33
March9Rs. 1,000111.11274.44
April8Rs. 1,000125419.44
May10Rs. 1,000100519.44
Total Rs. 5,000 519.44

 

Value Averaging

MonthNAVAmount InvestedUnits purchasedNet Units
Jan10Rs. 1,000100100
Feb12Rs. 50041.66141.66
March9Rs. 1,200133.33274.99
April8Rs. 1,500187.5462.49
May10Rs. 8,0080542.49
Total Rs. 5,000 542.49

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