RCA benefits equity fund investors in four different ways.
- It reduces your overall cost of holding in volatile markets
|Month||Lumpsum||Alpha Fund NAV||Monthly SIP||Units Allotted||Cumulative Units|
|Jan 2017||Rs1,20,000 invested in Alpha Fund on January at NAV of Rs25 allotting 4,800 units at the start of the year||25.00||Rs10,000||400.00||400.00|
|Lumpsum Units||NAV||Lumpsum Value||SIP Units Allocated||Closing SIP Value|
As can be seen in the above table, the lumpsum investor is sitting on a loss at the end of the year, while the SIP investor acquired more units during the year due to the power of RCA. That is how RCA makes volatility work in favor of the SIP investor.
- SIP instills investing discipline
|How a SIP of Rs10,000 per month at 15% CAGR generates wealth over time|
|Particulars||5-Year SIP||10-Year SIP||15-Year SIP||20-Year SIP||25-Year SIP|
|Total Invested||Rs6 lakh||Rs12 lakh||Rs18 lakh||Rs24 lakh||Rs30 lakh|
|Final Value||Rs8.97 lakh||Rs27.87 lakh||Rs67.69 lakh||Rs1.52 crore||Rs3.28 crore|
|Wealth Ratio||1.495 times||2.323 times||3.761 times||6.333 times||10.9333 times|
The power of discipline in investing is a result of RCA. As the time frame of this discipline increases, you can see the wealth ratio also going up substantially.
- It saves you from having to time the market
At a more practical level, the reason RCA works is that it synchronizes with your inflows. Hence, you are not forced to terminate your SIPs in the middle. This is one of the most important reasons why RCA is successful!