Dollar-cost averaging is a smart and effective investment strategy that involves investing a fixed amount of money at regular intervals, such as monthly or quarterly, rather than investing a lump sum all at once. This approach helps to reduce the risk of investing a large sum of money at the wrong time, when the market is at a peak.
Instead, by investing a smaller amount at regular intervals, investors can take advantage of market fluctuations and purchase shares at a lower average cost over time. This can lead to a more stable and consistent growth in the value of the investment, which can help to achieve long-term financial goals.
For example, let's say you have INR 1,20,000 that you want to invest in a mutual fund. Instead of investing the full INR 1,20,000 all at once, you could use dollar-cost averaging and invest INR 10,000 per month for 12 months. This means that you'll be buying units of the mutual fund every month, rather than all at once.
If the unit price of the mutual fund is relatively stable, then the price you pay for each unit will be fairly consistent. However, if the unit price of the mutual fund is more volatile, then the price you pay for each unit may vary.
For example, if the price of the mutual fund increases significantly in the first month, you'll be paying a higher price for your units. But if the price drops in the second month, you'll be paying a lower price for your units. For this, here are some tactics to play smart:
Set up auto-monthly investments into the mutual fund of your choice to ensure that you are consistently investing at regular intervals and this will help to eliminate the risk of missing an investment opportunity.
Consider investing in multiple mutual funds to spread your risk across different sectors such as finance or technology, markets such as equity or debt, and investment styles such as growth or value.
Review your portfolio regularly to ensure that your investments remain in line with your risk tolerance and investment goals.
Avoid making impulsive decisions and stick to your dollar-cost averaging plan, even during market downturns. Remember that investing for the long term can help to smooth out short-term fluctuations in the market.
Stay informed of current economic and market conditions, as well as any changes to the mutual fund you are investing in, to make informed decisions about the sectors or markets.
Additionally, dollar-cost averaging can also help to reduce the psychological impact of market volatility, as it allows investors to focus on their long-term goals rather than short-term fluctuations.
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