Can’t time market? So let’s beat it
It is said that one can’t predict how market moves
By : adhil shetty
Update: 2015-09-22 07:41 GMT
Leading investors of our times, including the legendary Benjamin Graham, believed that dollar cost averaging (or rupee cost averaging in our case, a term that we shall use here) is the most important tool in the hands of common investors. Rupee cost averaging is nothing but investing a certain amount of money in stocks or mutual funds periodically.
Investors buy stocks at regular intervals irrespective of the price of the unit. This cancels out the effect of price fluctuation in the market. What is essentially being done is to buy more units of investment assets when the prices are low and buy less when the prices are high. The cost of investment asset is averaged over the long term. Since markets tend to move upward in the longer run, this strategy works for common investors.
In case of mutual funds, the same rupee cost averaging is known is systematic investment plan or SIP. In this case, investors buy mutual fund units worth a certain amount every month.
If you look at the investment at current price in both the cases, the gain is little less than the market when the prices go up and loss is also lesser than the market when the prices go down. This plan effectively reduces the risk inherent in one-time investing. Secondly, look at the average price in first table (in a bullish market).Your average price is much less than the market price of the mutual fund.
Now look at the total units accumulated in a year. In case of bull market (first table), the number of units accumulated in a year 5218 units. In case of bearish market (second table), the number of units accumulated is 6,597. You have accumulated 1,400 more units in the latter case. Any spurt in prices will give you a much better advantage in the second case. Hence, you can see that in case of SIP, prices going down or up periodically helps investors.
Starting S.I.P.
All mutual fund companies provide the facility to start investing under an SIP scheme. You have to fill up a mutual fund form as well as an SIP form and give a cancelled cheque of the bank account from where the a certain amount will be invested automatically in the selected mutual fund. You can also fill up the number of years to which you wish to invest.
For stocks, you have to open a demat account as stock trading happens only in the demat format. Open a demat account with any of the broking firms and fill up the online form to start the SIP in a specific stock.
How S.I.P. helps
Investing through an SIP prevents investors from worrying over the price of the stock or the mutual funds. When the prices come down, your fixed amount can buy more of the units and when the prices go up, this adds to your capital gains.
The rupee cost averaging has been the most effective strategy for common investors who stay put longer with the plan. Moreover, investing monthly develops a disciplined approach to money and investing, which is the key to build wealth.