Dollar-Cost Averaging Principle

The Principle of Dollar-Cost Averaging involves a diciplined regular investment technique which may be applied to maximum effect in unit trust investing. This investing technique intended to reduce exposure to risk associated with making a lump sum purchase. All an investor has to do is to invest a regular fixed sum of money with a selected unit trust fund over a period of time (daily, weekly, monthly, quaterly, etc.). This way, investor does not have to worry about market timing, or where shares prices or interest rates are headed. Regular investment will purchase less units when market is up, and more units when market is down. It safeguards against the market losing value shortly after making investment and limit the downside of an immediate drop in asset value after a lump sum is invested.

Illustration:



Let us assume Investor A decided to invest a monthly savings of RM400 with the fund over a period of 24 months.

In the first 12 months, Investor A thus managed to accumulate 8,026.47 units at an average cost of RM0.5980 per unit at market uptrend whereas the average NAV per unit over the period was higher at RM0.6008.

During the next 12 months, Investor A manage to accumulate a total of 9,270.36 units at an average cost of RM0.5178 per unit at market downtrend which is lower than the average NAV per unit over the period at RM0.5183.

Units will be bought at an actual cost which is lower than the average NAV per unit over the same period by regular investing the same amount of money in the fund irrespective of price fluctuations.

Also referred to as constant dollar plan. In the United Kingdom, it is known as pound-cost averaging.

In Malaysia, it is known as ringgit malaysia-cost averaging. *quote by kkchow23