Showing posts with label Dollar Cost Averaging. Show all posts
Showing posts with label Dollar Cost Averaging. Show all posts

Friday, June 16, 2017

Is Daily SIP Superior to Monthly SIP?

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Actual Question

Is a daily SIP of Rs. 2,000 in a mutual fund a better idea than a monthly SIP of Rs. 60,000?

Dear Friend!

You have asked a very interesting question.

The key concept behind a systematic investment plan (SIP) is to even out the price fluctuations. Since timing the market is extremely difficult, wise people had devised to achieve the next best thing, the ‘Dollar Cost Averaging (DCA)’ through SIP.

Now the focus shifts to your question regarding whether it is ideal to achieve DCA by investing daily or monthly.

Of course, it goes without saying that as the frequency of investing increases better averaging is achieved.

If this is so, why once a day?

Why not every hour?

So it is all about the question of reasonableness.

One has to strike a balance between the improvement in results and the time and effort involved in making investments. Obviously there is an opportunity cost involved for the time and efforts expended!

And finally in real investing, where we are talking about long times of two to three decades, it really is not going to make much difference whether you are investing through SIP on a daily basis or monthly basis.

To conclude in the real world of true value investing monthly SIP is adequate and one need not take the trouble of investing daily to achieve better dollar cost averaging.

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Thank you,

With Best Regards,


Tuesday, August 9, 2016

What Is Dollar Cost Averaging?

When you buy shares at different prices on various dates the result is an amazing thin called the 'Dollar Cost Averaging' having a profound impact on your portfolio and returns on your investments.

Dollar cost averaging is a nice sounding term for a simple concept of weighted average cost. let us see the example from our educational portfolio 'Portfolio 2K15'.

The ‘Dollar Cost Averaging’ is done only a way of Reporting. Your port folio shows the average holding cost at a glance for your convenience. However when you click on the name of the scrip the detailed page opens showing the various purchases on the various dates at various prices. Therefore I would say that the actual data and records remain intact and only in the report the holdings are dollar cost averaged.

If we examine my favourite scrip NMDC Ltd., in April 2016 we are holding 444 shares at weighted average holding cost of Rs.107.58. If we go deeper into the detailed purchases on various dates it will look as shown in the following table:

We can see that beginning with a price of Rs.130.48 in March, 2015 when the market was high, we were able to buy the shares at as low a price as Rs.81.35.

The beauty of dollar cost averaging is that over a very, very long period of time of say three to four decades, one is able to purchase the scrips at various levels, from very low and the weighted average cost is optimal, making timing the market, which is extremely difficult, irrelevant.

The second advantage is one can achieve spectacular dividend yield through dollar cost averaging. NMDC is quite generous in paying dividends and the yield is generally 10%, which on a tax free basis is simply superb. Suppose after 20 years the price of the share is Rs.800 and the dividend yield at that time is 10% it means the company paid a dividend of Rs.80 per share. Such a dividend on the 444 shares purchased at an average cost of Rs.107.58 is yield of 74.36% per annum. If you consider the capital appreciation, your 444 shares bough at and average Rs.107.58 are valued Rs.800 apiece, giving a return of 643% in twenty years. 

From the above it becomes clear how Riches are built on stock markets through prudent investments over long periods of time through dollar cost averaging.