What is it?
Equity market investors always want to buy low and sell high but timing the market rarely works. If you are a long-term investor who buys shares based on fundamental attributes, a strategy that eliminates the need to time the market is rupee-cost averaging. Under this strategy, you invest a fixed amount at predetermined intervals over a period of time. So if the price of a share is high you will get fewer units and if it is low you will get more units. In the long run, the average price of shares is lowered and there is no need to time the market.
How does it work?
Say, you bought 10 shares of a company at Rs 100 apiece. The next tranche of investment is due in a month. Subsequently, the price of the stock went down to Rs 80 apiece. Now you buy another 10 shares of the company which pulls down the average cost of per share to Rs 90 (100*10+80*10/20=90). Alternatively, after a month prices may escalate to Rs 120, pulling up your average price to Rs 110 (100*10+120*10/20). But since the recommended strategy of investing is buy-and-hold, in the long run after the market experiences crests and troughs, this strategy works well.
How can you do it?
Many brokerages give you the option to set a predetermined amount or number of stocks to be triggered on a given date. For example, you can earmark Rs 500 to be invested in the shares of a particular company on a given date every month for a year. This will mean that through the various ups and downs of the market during the 12 months, you will be able to buy the share at high and low prices. You can also give standing instruction to the brokerage house with which you have a trading account irrespective of the fact whether it provides the above-mentioned facility.
You can even open a systematic investment plan with a mutual fund for a fixed period of time.
Is it useful?
Rupee-cost averaging does not guarantee a profit or any kind of protection in volatile markets. However, it has been seen in the past that this strategy generally works in favour of investors over the long run.
Also, this strategy instils investing discipline. However, like any other equity investment, you may not be able to bank on this money during an emergency if the markets are low. You must continue averaging price for a long period (at least 12 months or more) and hold on to your position for even longer.