There is a general rule of life
"Everything which goes up, has to come down", and that also happens to the prices of stocks or Mutual funds which we buy.
The most famous question, "What is the bottom of the market" has no answer, even with the hard core analyst or with your favourite broker. So lets make you aware of one strategy which can help you making profit without having the worry about timing the market. A strategy which every Fund Mansger suggest to its investors, and a strategy which I, Mayank Gupta, Founder at http://www.wealthbazaar.in/ suggest it to my loyal clients.
In simple language, "The process to buy Mutual funds or even shares at regular intervals, that may be monthly, weekly or daily without looking at the current prices of a underlying assest i.e a stock or a mutual fund"
By following this strategy, a investor is able to accumulate more units/shares at the market bottom & a fewer shares or mutual fund units when the markets are at the top. So, in the end, he is able to average his purchase price
This helps in get rid of volatility in the stock market since it smoothens out big ups and downs
of the volatile markets like Dow Jones or may be Indian index of Sensex.
Lets explain it with the help of Example. A investor buys 500 shares of IDFC Limited at Rs 150 per share. Total Investments made in this case is Rs 75,000. A month later, prices went down to Rs 120 per share, now if you broadly look, you are a t a loss of Rs 15000 in just one month (500 shares * Rs 30 per share) & you start reeling your mind, "I hope, I could have waited & bought at these odd levels of 120
Let us look at an another strategy. What if you had some discipline in your Investments & invested a fixed sum of Rs 15,000 every month for 5 months? In the first month, you would have got 100 shares at Rs 150. With the price down to Rs 120 the next month, you could have got 125shares. Refer to the table below
| Month | Share price (Rs) | Amount invested (Rs) | Shares bought |
| 1 | 150 | 15,000 | 100 |
| 2 | 120 | 15,000 | 120 |
| 3 | 135 | 15,000 | 111.11 |
| 4 | 160 | 15,000 | 93.75 |
| 5 | 150 | 15,000 | 100 |
| Total | 75,000 | 524.86 shares |
Now, if you could have followed this strategy, it would have helped you to accumulate 524.86 shares or units of Mutual funds as against 500 shares in Lump Sum Investments. A difference of 25 shares or Rs 3750 in total out of a Investment amount of just Rs 75000. This strategy of buying in parts is nothing but Rupee Cost Averaging strategy.
If you like reading this article, kindly read
Regards
Mayank Gupta
Founder
mayankportfoliomanager@yahoo.com
http://www.wealthbazaar.in/
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