Rupee-Cost Averaging: Units and Average Cost
A fixed SIP instalment buys more units when the NAV is lower and fewer when it is higher. This lesson works out the average cost per unit, shows why it sits at or below the simple average of the NAVs, and explains what averaging does not do.
Fixed rupees, varying units
In a SIP the rupee amount is fixed and the NAV is not. Since units bought = instalment ÷ NAV, after stamp duty of 0.005%, each instalment buys more units when the NAV is lower and fewer when it is higher. This pattern is called rupee-cost averaging.
Average cost and the simple average of NAVs
The average cost per unit is the total amount invested divided by the total units bought. It is a different figure from the simple average of the NAVs on the instalment dates, which adds up those NAVs and divides by the number of instalments.
Because more units are bought at the lower NAVs, the lower prices carry more weight in the average cost. The average cost is therefore at or below the simple average of the NAVs. The two are equal only if the NAV was the same on every instalment date: ₹4,000 invested three times at a NAV of ₹16 buys 750 units for ₹12,000, an average cost of ₹16 (stamp duty ignored). Whenever the NAV varied, in either direction, the average cost is the lower figure.
The comparison is with the NAVs on the instalment dates only. It says nothing about the market's average level over the whole period, because the SIP bought on a handful of dates and not every day.
What averaging does not do
Rupee-cost averaging describes how the cost of a holding is arrived at. It is not a gain in itself and it is not a protection. The holding shows a gain only if the current NAV is above the average cost; if the NAV is below the average cost, the holding shows a loss.
A fall in the NAV during a SIP means later instalments buy more units, which lowers the average cost. Whether that turns out well depends on what the NAV does afterwards: a fall may or may not be followed by a recovery. A SIP can be continued or stopped, and averaging does not settle which.
Rules at a glance
Three instalments of ₹9,000 (illustrative; stamp duty ignored)
- The NAVs on the three instalment dates are ₹30, ₹45 and ₹18.
- Units bought: 9,000 ÷ 30 = 300; 9,000 ÷ 45 = 200; 9,000 ÷ 18 = 500. Total = 1,000 units.
- Amount invested = 3 × 9,000 = ₹27,000.
- Average cost = 27,000 ÷ 1,000 = ₹27.00 a unit.
- Simple average of the NAVs = (30 + 45 + 18) ÷ 3 = 93 ÷ 3 = ₹31.00.
- If the NAV is now ₹30, the value is 1,000 × 30 = ₹30,000, a gain of ₹3,000. If the NAV is now ₹18, the value is 1,000 × 18 = ₹18,000, a loss of ₹9,000.
Result. The average cost is ₹27.00 against a simple average NAV of ₹31.00. The holding shows a gain when the NAV is above ₹27 and a loss when it is below.
Key points
- A fixed instalment buys more units at a lower NAV and fewer units at a higher NAV.
- Average cost per unit = total amount invested ÷ total units bought.
- The average cost is at or below the simple average of the NAVs on the instalment dates, and equal to it only when the NAV did not change.
- The comparison is with the NAVs on the instalment dates, not with the market's average level over the period.
- A holding shows a gain only if the current NAV is above the average cost; averaging does not assure a profit or protect against loss.
Common misunderstandings
- A lower average cost is not a profit: the holding gains only if the current NAV is above that cost.
- The average cost is not the average of the NAVs: it is total amount invested ÷ total units, which is lower whenever the NAV varied.
- The effect does not need a falling market: the average cost is below the simple average whenever the NAV varied, upward or downward.
Questions people ask
Why is the average cost below the simple average of the NAVs?
Because the fixed instalment buys more units at the lower NAVs, so the lower prices count for more in the total.
When are the two averages equal?
Only when the NAV was the same on every instalment date.
Does rupee-cost averaging assure a gain over a long period?
No. It describes how the cost is arrived at. If the NAV is below the average cost when the units are valued or redeemed, there is a loss.
What this lesson relies on
- SEBI Master Circular for Mutual Funds, 20 March 2026 (applicable NAV for purchases)
- Indian Stamp Act, 1899, as amended by the Finance Act, 2019 (stamp duty on mutual fund units from 1 July 2020)
This lesson was reviewed independently against these sources on 8 October 2026. Rules change: check the current regulation, scheme document or policy wording before relying on any figure. This is education, not advice.