Rupee cost averaging, shown with real-looking NAVs

Every SIP explainer uses the phrase "rupee cost averaging" and almost none of them show you the arithmetic. This chapter does. Once you have seen it with real-looking numbers, a market dip during your SIP will look like what it is: a discount, not a disaster.

The idea in one line

A fixed rupee amount buys more units when the NAV is low and fewer units when the NAV is high. Because you automatically buy more of the cheap ones, your average cost per unit ends up below the simple average of the prices you paid at. That is the whole trick. No forecasting, no timing.

Six months, one dip

Suppose you run a ₹3,000 monthly SIP into an equity fund, and the market has a rough patch in months two and three before recovering. These NAVs are invented but typical.

Three things to notice.

• Month 3, at the lowest NAV, bought the most units: 69.364. Month 6, at the highest, bought the fewest: 54.795.
• Your average cost (₹48.91) is below the average NAV (₹49.20). That gap is rupee cost averaging. It exists only because you kept buying through the dip.
• The NAV ended just 5.1% above where it started, but your holding is up 11.9% on the money invested, because so many of your units were bought cheaply in the middle.

Compared with a lump sum

What if you had invested the whole ₹18,000 in month 1, at ₹52.10? You would hold 345.489 units, worth ₹18,916 at month 6. The SIP ends ahead by ₹1,232. That is not because SIPs always beat lump sums. In a market that rose every single month, the lump sum would have won. It is because in a market that dips and recovers, which is what markets usually do over any six-month stretch, buying in pieces lowers your cost.

The lesson is not "SIP beats lump sum". It is "a SIP makes the path irrelevant". You do not need to know whether next month is up or down. Whichever it is, the instalment does the right thing.

What averaging cannot do

Be clear about the limits, because the phrase gets oversold.

• It does not protect you from a market that falls and stays down. If the NAV ends at ₹40, your holding is worth less than you put in, averaging or not.
• It does not add return on its own. It lowers your average cost relative to the path of prices. The return still comes from where the NAV ends up.
• It works best in volatile, long stretches. Over a few weeks, or in a market that only climbs, the effect is tiny.

With a daily SIP, the same mechanism runs on twenty or more days a month instead of one. The averaging is finer, but the principle is identical.