The Rationale For Investing Into an Automatic Investment Plan
Every individual saves to consummate some financial goal in the future. It could be saving for retirement, purchasing a house property, education, vacations etc. Whilst most of our needs may be current, we do tend to direct a large pie towards saving for our long term goals. While this is an ideal praxis, in the long term, our invested capital faces market risks, credit risks, currency risks, liquidity risks, default risks etc. Most of these center on the kind of asset class and quality of investments we buy into. However, each long-term investment faces risk from inflation, which escalates cost of living on one hand, and shaves off our investment surpluses on the other. In other words, inflation increases the prices of our essential commodities and attenuates the value of our money.
It is therefore quintessential to select investments, which beat inflation. Research has time and again proves that the return from equities outperforms every other asset class in the long term. As such, it is best equipped to beat inflation in the long run. Most investors deter investments from the fear of the markets inevitable and incognizable fluctuations. One would fathom, that the ideal investment would be to buy low and sell high. Such a rule, though ideal, suffers from the limitation that markets are essentially elusory, and investors are fickle. Furthermore, many investors are constrained by the fact that their monthly surpluses are very meager to buy into a large portfolio of investments.
The ideal way to create wealth it is to save regularly and invest a specified dollar amount into a diversified equity mutual fund on a regular monthly basis. This plan is the ‘Automatic Investment Plan’ that enables pre authorized electronic transfers into a mutual fund account. The technique of such investing is called ‘Dollar Cost Averaging’. Not only does a plan like this elude the risk of market timing, but it also carries the benefit of the power of compounding your monthly returns over a span of multiple years. Dollar Cost Averaging is based on the premise that more units are bought when the purchase price is low and fewer when the purchase price is high. Over the long run, the average price ‘per unit’ is much lesser than the simple average market price of the fund. This enables investors to purchase a higher quantity of units at an average market price, which ameliorates the volatility in the long run.
Conjointly, the power of compounding monthly ensures that your capital and reinvested earnings work hard on building a significant corpus. The funds that an investor should select are those, which have a track record of consistently outperforming their benchmarks.
This is one plan, which any investor who procrastinates investing, can buy into to inculcate some discipline in savings and investments.