Periodic investing

Nobody can reliably buy at the bottom. Periodic investing is the strategy that stops you having to.

Instead of putting a large sum in on one day, you put a fixed amount in at regular intervals. Each instalment buys at whatever the price is that day.

The arithmetic then does something useful on its own. A fixed rupee amount buys more units when the price is low and fewer when it is high. So the average cost of what you own drifts below the average price.

The workbook is careful about the claim. The average cost is not the lowest price in the period. What the strategy does is bring the cost down without trying to time the market.

It also explains why timing is the worse option. It needs skill and information most investors do not have. Markets may rise before the investor gets in. And while they wait, the money sits idle instead of earning.

The mechanism. Section 7.2 sets it out for equity: given volatile prices, the best way to accumulate is to build the portfolio in smaller, regular instalments over a period of time instead of trying to buy at the lowest prices. When prices are low the number of units added is higher than when prices are high, so the average cost of acquisition is likely to come down in a volatile market. The workbook says the strategy can be applied to all investments that have volatile prices.

In a falling market too. The investor accumulates more units when prices fall, and when markets turn up, the larger number of units translates into a higher portfolio value.

In the bond market as well. Where a retiree is buying bonds and debentures in the secondary market to generate fixed income, planning periodic purchases over a period can help get a better yield on the portfolio, because the bonds are bought at different prices.

The step-up. The workbook adds a separate discipline on top: step up the periodic savings each year to keep pace with the increase in income. If the investor gets a salary hike of 10 percent, the attempt should be to increase savings by 10 percent over the previous year. It calls this a more effective way to keep savings moving up with income than staying at a fixed amount.

How it gets executed. Section 7.6 names the tools: a Systematic Investment Plan, standing instructions from the salary account and bank sweep facilities. For the NPS, Chapter 4 adds the D-Remit facility, where a virtual identifier linked to the PRAN lets a subscriber set up standing instructions for an auto-debit on chosen dates.

Its mirror image. The same logic run backwards is phased redemption — spreading withdrawals over time so that units are not all sold on a bad day.

The workbook's own table. Rs 1,000 invested every month into a mutual fund for seven months.

Value of the holding in July, at a NAV of Rs 18: Rs 8,586.23.

Read the units column, because that is where the strategy lives. January's Rs 1,000 bought 83.33 units at Rs 12. July's identical Rs 1,000 bought only 55.55 units at Rs 18. The same money bought 50 percent more units in the cheap month, purely because the rupee amount was fixed and the price was not.

Average cost per unit = 7,000 / 477.01 = Rs 14.67
Simple average of the seven NAVs = Rs 14.93

The average cost sits below the average price. It is also nowhere near Rs 12, the lowest price in the period — which is the honest limitation the workbook states.

The step-up, in rupees. Suppose the investor's Rs 1,000 a month is 10 percent of a surplus that grows 10 percent a year. Held flat, year two still contributes Rs 12,000. Stepped up with income, it contributes Rs 13,200, then Rs 14,520, then Rs 15,972. Over a long accumulation period that escalating contribution is the difference the workbook is pointing at when it says the discipline produces a much larger corpus at the end.

Chapter 7, section 7.2 (Periodic Investments), is the whole basis of this page, with the seven-month table reproduced above, and section 7.6 (Automating Investments) supplies the execution tools. Chapter 6 makes the same point about open-ended funds being accumulated in a phased manner to benefit from averaging down the cost.

Expect a question on why periodic investing lowers the average cost (a fixed amount buys more units at lower prices), and the workbook's own caution that the average cost is not the lowest price. The step-up rule — raise savings by the same percentage as the salary hike — is a separate, easily set question. The chapter's sample question on what an investor must decide when signing up for a systematic plan (the amount, the periodicity and the number of instalments — all of them) also belongs here.

• Periodic investing does not get you the lowest price. It gets you a good average price without market timing. The workbook says this explicitly, and an option claiming the lowest cost is wrong.
• It works because the rupee amount is fixed, not because the unit count is. Fixing the number of units bought each month would destroy the averaging effect entirely.
• A falling market is not a failure case. More units accumulate, and the benefit appears on the recovery.
• It applies to any volatile-priced investment, including secondary-market bonds — not only to equity mutual funds.
• The step-up is a separate discipline. Matching a 10 percent salary rise with a 10 percent increase in savings is not part of the averaging mechanism; it is an additional instruction in the same section.
• Averaging does not remove market risk. A holding accumulated at an average cost of Rs 14.67 is still worth whatever the NAV says on the day it is sold.
• Do not confuse this with a Recurring Deposit. Both take a fixed monthly amount, but an RD pays a rate agreed at the start while periodic investing buys at the prevailing price.