Rupee Cost Averaging Case Study

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Market Risk
Sometimes prices and yields of all securities rise and fall. Broad outside influences affecting the market lead to this. This is true, may it be big corporations or smaller mid-sized companies. This is known as Market Risk. A Systematic Investment Plan (SIP) that works on the concept of Rupee Cost Averaging (RCA) might help mitigate the risk.

Credit Risk
The debt servicing ability of a company through its cash flows determines the Credit Risk faced by you. This credit risk is measured by independent rating agencies like CRISIL who rate companies and their paper. A ‘AAA’ rating is considered the safest whereas a ‘D’ rating is considered poor credit quality. A well – diversified portfolio might help mitigate this risk.

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Changes in interest rates affect the prices of bonds as well as equities. If interest rates rise, the prices of bonds will fall and vice versa. Equity might be negatively affected as well in a rising interest rate environment. A well-diversified portfolio might help mitigate this risk.

Political Risk
Changes in government policy and political decision can change the investment environment. They can create a favourable environment for investment or vice versa.

Liquidity Risk
Liquidity risk arises when it becomes difficult to sell the securities that one has purchased. It can be partly mitigated by diversification, staggering of maturities as well as internal risk controls that lean towards purchase of liquid securities. It simply means that you must spread your investment across different securities (stocks, bonds, money market instruments, real estate, fixed deposits etc.). This kind of a diversification may add to the stability of your returns, for example, during one period of time equities might under perform but bonds and money market instruments might do well enough to offset the effect of a slump in the equity

There are certainly some benefits to mutual fund investing, but you should also be aware of the drawbacks associated with mutual