Dollar Cost Averaging
Updated on March 6, 2023
While investing in markets, fluctuation in prices and volatility are key characteristics. Dollar Cost Averaging is a strategy used for investing periodically or at regular intervals, so that the total average cost stays low. Markets are characterised by frequent price movements and hence, investments in market related products like Mutual Funds or Exchange Traded Funds are considered risky. For reducing the impact of price instability, investors are advised to invest a sum regularly instead of investing large, one time amounts or lump sums. This also removes the need for market timing. Dollar cost averaging also helps in spreading a large investible amount to be distributed equally over a longer period of time for a fixed duration.
Benefits of Dollar Cost Averaging
Benefits of Dollar Cost Averaging are:
1. The regular investment amount buys more units when markets are down and less units when markets are up, but the overall impact helps in ‘averaging’ or buying more units over a longer timeframe.
2. Investors have control over the amount to be invested.
3. They can choose the frequency, amount and duration of investment.
4. It removes any emotional or human behaviour bias.
5. It helps in target or goal based investing.