*Client* : Hi Mr. Advisor , I want to know the differance between *stock SIP vs Mutual fund SIP* . Whichone is better & why ? Can u explain both the concepts ?
*Advisor* : Yes sir surely. Why not.
Well, *stock SIP is averaging and mutual fund SIP is rupee cost averaging.*
Albert Einstein quote…
*Compound interest is the eighth wonder of the world.*
*SIP is nineth wonder of the world.*
*Client* : Oho.. How !!! 🤔
*Advisor* : Let say, you want to buy 10 Kg. apple every month….
Price of apple in January – 20 per kg. Your expense is Rs.200, right?
Price of apple in February- 40 per kg. Your expense is Rs.400
The average per kg cost is 20 + 40 = 60 / 2 = 30 per kg.
*This is average and your stock SIP is working on same principle.*
*Client*: Then what is rupee cost averaging?
*Advisor* : Suppose your budget is to spend Rs. 200 per month on apple. No matter what is the price.
Price of apple in Jan – 20 per kg, so you can buy 10 kg. (200/20)
Price of apple in Feb – 40 per kg. So you have 5 kg. (200/40)
Now tell me the average of per kg apple.
*Client*: Same 30 per kg
*Advisor* : No.
Number of kg you bought = 10 + 5 = 15
Total cost = 200 + 200 = 400
Average cost = 400 /15 = 26.66
Now in the above eample as stock SIP , you bought of apple is averaged at Rs. 30. per kg. & as Mutual Fund SIP , your buying cost is averaged at Rs. 26. 66 per Kg. for the same apples.
*This is Rupee cost averaging. Mutual fund SIP is working on this principle.*
*Client*: oh great!! So every time our cost per unit is less than its avg. Now I fully understood rupee cost averaging. It’s awesome..