Benefits of Regular Investing

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It's hard to time markets
Make no mistake, it's hard to time when to enter and exit markets. Financial markets are made up of a host of different investors. There are large institutions, such as fund managers, as well as companies, brokers and individual investors. Over the long-term, markets can do well but in the short term, prices fluctuate on the basis of fundamental news, market sentiment, expectations, rumour and competitor activity.

Sometimes the 'herd' mentality can set in. When the news about a particular stock is good, investors buy in. Even though the price keeps rising, buyers keep buying, as nobody is sure when the price has peaked. Similarly, when prices are falling, nervous investors sell in an attempt to cut their losses.

There are statistical measures and yardsticks, such as price-earning ratios, which help determine the true value of a stock or bond, but as the boom and bust in Internet stocks has proven, rational measures are often ignored and sentiment can take over. Deciding when to invest in this environment can be a stressful task. If the market is doing well you may fear that you're buying when prices are too high. By contrast, when the market is falling, there is a reluctance to invest due to fears that it may fall further. So what should an investor do to avoid having to make these timing decisions?

Why investing regularly works?
Investing on a regular basis removes the stress of "timing the market" because you are employing the concept of "Rupee Cost Averaging". If you are an investor in mutual funds it means that you buy more units when the purchase price is low and fewer units when the purchase price is high. The trick to all this is to remember that it's not the price you pay for each unit that matters. It's the average price per unit over time that determines your overall return.

Rupee cost averaging in action
Lets look at an example to make all this a bit clearer. Ajay has been investing Rs 5,000 per month in a particular equity mutual fund scheme since October 1999. The table below shows the purchase price Ajay paid for the units each month as well as the number of units Ajay purchased.

Regular DateInvestmentPurchase Price per Unit No. of Units received
Oct 1999- Rs. 5,000- Rs. 10 - 500
Nov 1999 - Rs. 5,000 - Rs. 9 - 556
Dec 1999 - Rs. 5,000 - Rs. 9 - 556
Jan 2000 - Rs. 5,000 - Rs. 8 - 625
Feb 2000 - Rs. 5,000 - Rs. 7 - 714
Mar 2000 - Rs. 5,000 - Rs. 7 - 714
Apr 2000 - Rs. 5,000 - Rs. 6 - 833
May 2000 - Rs. 5,000 - Rs. 6 - 833
June 2000 - Rs. 5,000 - Rs. 6 - 833
July 2000 - Rs. 5,000 - Rs. 7 - 714
Sept. 2000 - Rs. 5,000 - Rs. 9 - 556
Oct. 2000 - Rs. 5,000 - Rs. 10 - 500
Total Rs. 65,000 - 8,648

A brief glance at the table reveals the benefits of Rupee Cost Averaging. When the purchase price was high (eg. Rs 10 in Oct 1999), Ajay bought fewer units (500) and when the purchase price was low (eg. Rs 6 in Apr 2000), he bought significantly more (833).

The benefits of this strategy are twofold:
The average price Ajay paid for the units was Rs 7.52