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Most mutual fund companies give you the choice of making a lump-sum investment (minimum amount of at least $500 or $1000 and sometimes even more) OR periodic investment.
When it comes to long-term investment, such factors as discipline and consistency can directly affect the future value of your investments.
Since unit prices fluctuate over time—moving both upward and downward—periodic investment is recommended. Why? Because you benefit from price variations.
Periodic investment can give you:
Flexibility
Usually, you determine the amount and frequency of your investments. You can also usually modify the amount and frequency at any time to take into account changes in your professional, family or financial situation.
At the expected date, the amounts to be invested will be automatically transferred from your account. Everything is done for you!
Dollar-cost averaging
When you make periodic investments, the amount remains the same. So you receive more units when prices are low and fewer when prices climb. However, either way the average cost will generally turn out to be advantageous.
Example: You invest $100 per month in a fund that is priced at $10 a unit at the beginning of the year. As shown in the table below, the price may vary from one month to another with a low of $8 and a high of $11.
At the end of the year, the average cost per unit is $9.06 compared with $10 at the beginning of the year! This demonstrates the benefits of dollar-cost averaging.
Since returns are calculated using average costs, this is a winning strategy!
Month
|
Unit price
|
Periodic investment ($)
|
Number of
units purchased
|
January
|
$10
|
100
|
10,000
|
February
|
$9.5
|
100
|
10,526
|
March
|
$9
|
100
|
11,111
|
April
|
$9.75
|
100
|
10,256
|
May
|
$8.75
|
100
|
11,429
|
June
|
$9.25
|
100
|
10,811
|
July
|
$8
|
100
|
12,500
|
August
|
$7.5
|
100
|
13,333
|
September
|
$8.5
|
100
|
11,765
|
October
|
$8.75
|
100
|
11,429
|
November
|
$9.75
|
100
|
10,256
|
December
|
$11
|
100
|
9,091
|
Total
|
|
1,200
|
132,507
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Final value
|
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$1,457.58
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Average cost
|
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|
$9.06
|
Peace of Mind
By making periodic purchases, you don’t have to worry about trying to time your investments. When you are regularly in the market, you can thus avoid having to make decisions that are driven by emotion.
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