Benefits of Mutual Funds

Stock markets are characterised by ups and downs. Predicting the right moment to enter and exit the market consistently is virtually impossible. The best Fund Managers also find it difficult to predict the stock markets. This unpredictability is both an opportunity and a threat depending upon how you use it. Here is a proven investment strategy that attempts to take advantage of the volatile nature of the stock markets. This strategy is called Rupee Cost Averaging.

Rupee Cost Averaging is a disciplined investment practice that takes the guesswork out of ‘timing’ the markets. This strategy involves investing a fixed amount in the same investment at regular intervals - every month or every quarter. The essence of this strategy is that more units are purchased when prices are low and fewer units when prices are high. Over time, this results in the average cost per unit - the money you pay being lower than the average price per unit.

It is important to note that although Rupee Cost Averaging eliminates the guesswork involved in market timing, it does not guarantee a profit or guarantee against loss in a declining market. However, with Rupee Cost Averaging you avoid investing too much when the market is high or too little when the market is low.

How to make it work for you?

• Decide the amount that you are comfortable investing regularly over a period of time. (Any amount from Rs 2,000 onwards)
• Choose how often you want to invest - monthly or quarterly.
• Maintain a long-term perspective. Rupee Cost Averaging works best over an extended period.
• Invest regularly. Do not get influenced by short-term fluctuations in the markets.

Inflation can steadily impact the value of your income. However, long-term investing can provide returns that surpass inflation through the power of compounding.

Year after year, any money that you invest may earn interest, dividends or capital gains. When you reinvest these earnings, they help to generate additional earnings. Additional earnings generate more earnings and so on. This is called compounding.

For example, if an investment earns 8% per year and these earnings are reinvested annually:

• After one year, your total return will be 8%
• After five years, your cumulative total return will be 47%
• After 10 years, your cumulative total return will be 116%
• The sooner you begin investing, the greater the compounding effect.

Consider the example of Chhaya and Punit, both 65 years old. They worked for the same company for 35 years. Both invested in the same managed fund.

• Chhaya started investing at the age of 30 years. She invested Rs 1,000 each year for 10 years and earned 8% per year. Then she stopped contributing. Her investment continued to earn an 8% annual return. When she reached the age of 65 years, her investment of Rs. 10,000 had grown to Rs. 1,07,148.*
• Punit did not start investing until the age of 40 years and then invested Rs. 1,000 each year for 25 years. He also earned 8% per year. At the end of the period, his investment of Rs. 25,000 was worth Rs. 78,954.

As you can see, although Chhaya contributed to her investment for 15 fewer years than Punit and invested Rs. 15,000 less, she accumulated Rs. 28,194 more than Punit simply because she started investing 10 years earlier.