How Averaging Improves SIP Outcomes During Market Dips?
There’s no denying that volatile markets feel uncomfortable, even if you’re a seasoned investor. However, for long-term SIP investors, those dips are actually an opportunity in disguise. It’s the rupee-cost averaging that turns bear runs advantageous for systematic contributors. As an SIP investor, you just don’t survive volatility, but use the dips as viable opportunities to accumulate more units at lower prices. This is called averaging, where you bring down your overall cost to potentially enhance the upside for the future.
No wonder this disciplined strategy makes SIPs one of the most rewarding instruments to create long-term wealth. In this blog, we have comprehensively explained how averaging can boost your returns over time.
How the Rupee-Cost Averaging Works
When you invest a fixed amount regularly in your SIP every month, the cost gets averaged when the market falls. Long-term investors try to accumulate more units when the NAV remains low. Since the growth trajectory rises in the long term, accumulating on dips becomes critical. This helps you average out the purchase cost over time.
SIPs automatically apply this concept, so there’s no need for investors to time their contributions or make emotional decisions.
After the units accumulate aggressively during dips when NAVs are lower, the returns are naturally stronger as the market recovers. This goes a long way in amplifying your long-term gains.
Why Market Dips Improve Long-Term SIP Outcomes
Dips in the market offer you a unique window, where you can buy additional mutual fund units with the same monthly contribution. Now, let’s find out what happens behind the scenes.
Bearish markets lower the NAV, which means more unit accumulation. For instance, if the NAV falls from INR 50 to INR 40 while you invest INR 5,000 a month in your SIP, you can buy 125 units instead of 100. This reduces your average cost per unit. Long-term investors continue to purchase these units across different price points, which reduces the overall cost.
When the market recovers, you stand the opportunity to earn higher returns. This speeds up the overall value creation. This is why disciplined investors often enjoy higher long-term returns compared to panic sellers.
Consider using a SIP calculator to visualize long-term outcomes as you invest in a mutual fund. This will help you understand how costs average out during volatile periods.
Use Calculators to Understand the Power of Averaging
Investors generally use tools like the stock average calculator, sip calculator and SIP calculator to track the performance of their funds and understand the benefits of averaging.
Stock Average Calculator
A stock average calculator helps you determine:
- Your average purchase price
- Number of units accumulated
- Required price to break even
- Impact of additional investments during dips
If you average manually, this tool particularly comes in handy.
SIP Calculator
An SIP calculator helps you estimate:
- The future value of your portfolio
- The growth trajectory of your investment
- Impact of market volatility on cost averaging
- How unit accumulation changes over time
So, you can experiment with different return scenarios depending on market conditions using this tool to see how many dips will improve your overall SIP outcomes.
How Averaging Plays Out – Real-World Scenarios
Now, we have explained how averaging works in SIPs in real-world scenarios.
Let’s assume that you have created a monthly SIP of INR 5,000. Here’s how your NAV averages out over a period of 4 months during a bear run.
| Month | NAV (₹) | Units Bought |
| Month 1 | ₹50 | 100 |
| Month 2 | ₹45 | 111.1 |
| Month 3 | ₹40 | 125 |
| Month 4 | ₹42 | 119.05 |
Through averaging, you can accumulate 455.15 units at an average cost of INR 43.94 instead of buying 400 units at a static price.
When the NAV returns to 50, the low-cost accumulation pays its rewards, as you see your investment growing significantly. This is how averaging during dips practically pays out.
How Investors Can Make the Most of Averaging
Bear runs may appear demotivating for new investors, but the seasoned ones know how to capitalize on these entry points. Here are a few valuable guidelines that will help you make the most of averaging.
- When markets tumble, don’t pause your SIPs. Instead, try to invest a lump sum to lower your cost price.
- Use market dips to your advantage. During steep corrections, stay invested and top up if possible.
- Take advantage of calculators to stay informed during market corrections. When you track data, there’s no scope for guesswork.
- Averaging works best over multi-year periods. So, stay invested over a longer term to capitalise on these opportunities.
Conclusion
Now that you know how averaging works for SIP investors, you won’t be panicking when markets fall. With this strategy, you can make every correction work in your favour, reducing cost and boosting your returns over the long term. Use tools like the calculators we discussed to visualise your SIP outcomes over the longer horizon. Just ignore the short-term noise and let averaging work naturally through automated investments as you build more resilient portfolios over time.
