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Rupee cost average in Portfolio Revision
When an investor has no funds but yet he wants to build his investment, Rupee averaging plan is useful. Rupee cost average plan is beneficial over a long period of time. Whereas other formula plans like Constant rupee value plan, the constant ratio plan and the variable ratio plan are useful to investors who have already an accumulated fund for investment.
Applicability of Rupee cost average
The rupee cost average is applicable in the following situations:
1. The investors do not have a sum of investment.
2. The investors are to build a fund and invest some money for a future date.
3. The investor would invest a constant sum of rupees in specific stock of a particular portfolio on a continuous basis.
After thoroughly studying the stock prices, rupee cost average should be made. Rupee cost average plan advises to buy when the security prices are low. This will reduce the transaction costs like commission and brokerage.
Rupee Cost Average programme is useful over long periods of time and when greater fluctuations in prices bring benefits to the investors. It gives importance to selection, the right quality of stocks and the timing of purchase or sale.
Advantages of rupee cost averaging plan
1. Rupee cost averaging plan reduces the average cost per share and brings gains to the investor over a long period.
2. Rupee costing average plan avoids the pressure of timing the stock purchase from investors.
3. It enables the investor to have a rough plan of investment in respect of commitment of funds.
4. It is highly beneficial when the stocks are acquired in a declining market.
Limitations of Rupee Cost Average Plan
1. Frequent purchase and sale of securities in small quantities lead to higher transaction costs.
2. Rupee cost average plan is merely a strategy for buying of securities and it does not indicate when to sell them.
3. Appropriate intervals between purchases are not indicated by this formula plan.
4. If the stock prices show a downward movement, the averaging plan does not bring profit to the investor.
5. When stock prices have cyclical pattern, the plan works efficiently.