The Importance of Cost-Averaging Scheme when into Mutual Fund

The cost-averaging strategy is very applicable in succeeding when you are investing in mutual funds or when you are into common stocks. By employing this approach, an investor can greatly increase his chances of earning higher net over a period of at least 5 years and also reducing his risks of losing.

How does it work?

Before we proceed, let us first discuss what a cost averaging technique is all about. Firstly, it is designed to reduce market risk through careful planning and buying of securities and investments at a predetermined interval and with a predetermined set of amount. Many investors are practically applying this, and most, if not all, have attested that cost averaging is a technique that delivered them better profits.

Instead of investing or buying stocks in a lump sum, an investor buys securities at smaller prices slowly and in regular intervals, says every month.

Let me put it this way, you have 10, 000 USD and you have been eyeing on an investment worth 2USD per share. Instead of using up all of your 10, 000 to buy the stock, what you are going to do, in following cost averaging technique, is to buy 1000 USD in the first month, then another 1000 on the second month, and so on until you exhaust all your 10, 000. This spreads the cost basis out over several months, providing insulation against changes in market price.

If you are going to calculate, you will fare better than buying the whole thing one time.