Markets offer excellent opportunities to those willing and able to invest. To become a profitable investor one needs a good understanding of the market, a considerable sum to invest, a reasonable timeframe to stay invested for and a healthy appetite for risk. However, there are those, who are either risk averse or constrained in some other way, that prevents them from taking a direct exposure in the market. Traditionally, such investors have preferred professionally managed equity/debt funds. These funds move the onus of investment and risk management away from their customer/investors. However, they do not hold much appeal for many investors, who find it difficult to invest a lumpsum amount in one go. Also, since the funds' growth is governed by the stocks/bonds they represent, their units may be overpriced at the time of investment and may drop significantly in value in the following days.
Cost averaging
Since timing the market is a difficult task, one must use the cost averaging strategy. Cost averaging is a process of buying stocks in small quantities at regular intervals. Many fund houses offer their funds for investment under similar 'buying' plans, calling them a Systematic Investment Plan (SIP) or a Regular Investment Plan (RIP). The funds expect that a small amount be invested every month (the minimum investible amount may vary with funds).
Such funds may apply two kinds of charges -
1. an entry and/or exit charge - also called 'load', these are charged when entering (buying) or exiting (selling) from the fund.
2. annual fund maintenance charge - this, as the name suggests, is charged annually towards fund management fees.
A regular investment plan, however, does not necessarily have to be one invested in a managed fund. With a discipline of saving regularly and investing at regular intervals, any investor may earn good returns. Play with the regular investment calculator and learn benefits of inculcating a regular investment habit.
Imagine that you save a small amount, say £1000, each month and put it in your bank account that offers 5% rate on your deposits. Assuming that the savings find their way to the bank regularly for 2 years, the amount you earn at the end of this period will be about £1290 on top of your original investment of £24000. However, your gains jump to £3243 if you choose to invest in a index tracker fund that grows at an average rate of 12%. Such and even higher growth is easy to achieve when the power of compounding is applied to regular investments in the stock market.
