Mutual fund investors most often try to guess and speculate when to enter the financial market. Even in the real world experienced professionals, traders, portfolio managers, asset management companies, central bankers and economists find it very difficult to accurately predict the correct moment to enter or exit the stock market for their fund investments. There are many so-called financial gurus, news gurus who claim that they can tell you where the top and the bottom of the share market lies by using calculations, models, graphs, sentiment, connections and experience. Always remember no one till today has consistently predicted market tops and bottoms, not even the richest investors in the world.
Market volatility is the given norm for stock market investments, reproducing the ups and downs of the economy. Most often mutual fund scheme investors are influenced by this market volatility relying on our emotions and get swayed by market sentiments, news, blogs and end up buying mutual fund units when the stock markets are going higher and selling mutual fund units when they are lower. This is exactly what we should never be doing. Fundamental investing principles guide the investors to buy when prices are low and sell when high. It means that you need to buy more units of any type of mutual fund when the share markets are down and fewer units of any type of mutual fund when the markets are up. However, most of the investors end up doing just the opposite. They start buying when the stock markets are rising and unexpectedly redeem upon a slump or recession. Ultimately, the average cost of investing escalations and returns fall dramatically. A skilled investor, who has a lot of discipline and patience usually does just the opposite.
Rupee cost averaging aids mutual fund scheme investors to minimize this predicting inclination. The process of rupee cost averaging is when you invest a fixed amount of capital at consistent intervals regardless of whether the stock markets are moving higher or lower. This consistent approach ensures that you buy more units when the stock markets are low and lesser units when they are high. This technique brings down your average cost per unit over the long term.
Systematic Investment Plans commonly known as SIPs, of mutual funds work on the rupee cost averaging approach. By investing through Systematic Investment Plans, stock market volatility is mitigated to an extent, and as a result, these SIPs overall gains will increase. Systematic Investment Plans( SIPs ) do not work to lower your investment cost in any guaranteed way. Rupee cost averaging not only works out best in choppy markets but is useful even when the markets are in a bull market cycle. It mainly helps you buy less mutual fund units when the share markets are expensive and buy more mutual fund units when the share markets are cheap.
While rupee cost averaging doesn’t guarantee profits, it does demonstrate how a systematic approach to investing can prove highly effective in creating wealth over the long term. What actually matters is the mutual fund investors commitment towards their investment strategy over time. Basically, if an investor has patience, selects the right types of mutual funds and can remain invested through an economic recession, the chance of long term investment capital appreciation will be much larger.
The information, analysis and opinions expressed herein are for educational purposes only and are not intended to provide specific advice on any type of mutual fund schemes or tips or recommendations. This material is not an offer, solicitation or recommendation to purchase any financial products or services. Always remember that all investments carry some level of risk, including the potential loss of principal invested.