Rupee-cost averaging is not magic — it is arithmetic. Understanding the exact mechanism shows you when it helps most, and when to add to it with a step-up strategy.
Rupee-cost averaging (RCA) is the mechanism underlying every SIP. The idea is simple: invest a fixed rupee amount at regular intervals, and you automatically buy more units when prices are low and fewer when prices are high.
Suppose you invest ₹10,000 every month into a fund. In month 1, NAV is ₹100 — you buy 100 units. In month 2, NAV falls to ₹80 — you buy 125 units. In month 3, NAV recovers to ₹100 — you buy 100 units. Your average cost per unit: ₹10,000 × 3 ÷ 325 units = ₹92.3. But NAV is back to ₹100. You are already in profit — purely from the arithmetic of fixed-amount investing into a volatile asset.
RCA works because your fixed rupee amount buys more units at lower prices. The average cost of units you hold ends up lower than the average NAV over the period — as long as the market eventually recovers.
The benefit of RCA is largest in highly volatile markets that trend upward over the long term — which describes Indian equity markets fairly well. The more volatile the asset, the more units you accumulate during drawdowns, and the greater the benefit when markets recover.
A step-up SIP increases your investment amount by a fixed percentage each year — say 10%. If you start at ₹5,000/month and step up 10% annually, you invest ₹5,500 in year 2, ₹6,050 in year 3, and so on. After 20 years, you are investing ₹33,600/month. The corpus difference versus a flat SIP is substantial — often 30–50% more.
The step-up matches your likely income growth trajectory and keeps your investment rate constant as a fraction of income — rather than letting it erode as inflation and lifestyle costs rise.
Disclaimer
Not financial advice. Run your own numbers with Aurelian Capital.
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