The basic fundamental of investing lies in selling high and buying cheap. Easier said than done, volatile markets and changing market trends do not let this happen easily. Plus, constantly timing the market is even tough. With so many constraints in line, it becomes very difficult for an investor to keep their emotions aside and invest practically. Therefore, two different concepts called Rupee Cost Averaging and Value Averaging were introduced in the market.
While both of them have their pros and cons, these two are the most popular investments methods in the market.
Rupee Cost Averaging (RCA)
Rupee Cost Averaging is a very common concept these days as almost every investor is invested the SIP way. Under this method, you invest a fixed amount of money at regular intervals, generally per month. When the share price goes up or the NAV is high, you buy lesser units and when NAV is low, you buy more units. This sale and purchase of funds depending upon the market trends reduce the overall unit cost.
Value averaging is a bit tedious way of investing your money. The amount of investment is not fixed, it keeps on varying as per market trends. This is an upward approach; you fix your target amount as a long-term portfolio target. This long-term target is basically your value-path. The investors can hence adjust the growth of their portfolio by accordingly adding or removing just the amount that meets their target goal.
In simpler terms, under Rupee Cost Averaging if you have fixed Rs. 10,000 as quarterly SIP at NAV as Rs. 100 then you will lesser units when the NAV is Rs. 120 and more unit when the NAV is Rs. 80.
Whereas in the case of Value Averaging, you will have to time the market in order to determine the value path with every Rs. 10,000 per quarter added to your portfolio. By the end of Q1 at NAV Rs. 100, you will invest Rs. 10,000 and buy 100 units. In Q2 when NAV is Rs. 120, your investments are now worth Rs. 12,000, hence you will only need to invest Rs. 8000 to make up to Rs. 20,000.
In Q3, when the NAV falls to Rs. 80, your profile gets swindled to Rs. 13,333 and would require Rs. 16,667 more to be invested in order to make it Rs. 30,000. Lastly in Q4, when the NAV is back to Rs. 100, you only need to invest Rs. 2500 to reach the target portfolio of Rs. 40,000.
If consolidated in a table, the methods are like this:
|AVERAGE UNIT COST||92.9||100|
The returns on value averaging are higher but both the methods have their pros and cons.
In terms of convenience, RCA is a far better approach as it does not require the investor to time the market nor track the portfolio. VA is a more engaging approach which requires an investor to time the market and does not allow any automation of investments, unlike SIPs.
This is so because while dealing with Value Averaging, you will have to keep a constant eye on your portfolio and make changes accordingly.
Another important factor that needs to be considered in investing is that there can be deep pockets in both methods. Especially with value averaging, you will have to invest more even when the NAVs are high in order to meet your long-term target.
Discipline is a common factor among both. You have to be consistent and need to stay invested for at least 7 to 10 years to reap the best benefits of both the approaches. While value averaging keeps you focused but also requires you to be on toes to encash every opportunity. RCA is more of a laid-back approach and best for retail investors.