Earlier on, I have talked about two ways of making money on Mutual Fund Investments. One is Trading and the other is Money Cost Averaging. For beginners, we strongly recommend investing and earning from investments through money cost averaging...
Let me focus this blog on sharing how we can make money on Money Cost Averaging.
Money Cost Averaging means you need to have a regular frequency , and regular amount of money to be invested.
You earn by redeeming your investment when the total value of your share that you accumulated is higher than the total amount you have invested. Gain = Total Share Value- Total Investment. You lose when the Total Investments is higher than Total Share Value.
You can derive your Total Share Value by multiplying the Total Number of Shares you accumulated by the Share Value at the time you are redeeming or in formula format... Total Number Of Shares x Current Value per Share = Total Share Value.
Thus, you only redeem your shares when the value is higher than what you invested. Better yet, you just continue to invest based on the financial goal you have set...
It also means that you do not care whether the share value increase or decrease on the defined period you will put your money in. You just continually and consistently invest a regular amount of money on a regular period.
So, for example, your regular period of investing is Monthly, and your regular "Investible" Fund is 1000.00Php,
Say, the Mutual Fund you chose at the onset is 100Php/share, you can buy 10 shares. ( to simplify, I did not include the entry fee charges which is minimal). Say you started this month of January 2011. So you have 10 shares which has a share value ( or in Mutual Fund Terms - NAVPS: Net Asset Value Per Share) of 100Php/share
February, the share value dropped to 50Php/share, and so you can buy 1000Php/50Php/share = 20 shares. Now you have 10+20 = 30 shares in February. If you sell of the shares you have in January which you bought at 100, you certainly wont make money.
Come March, the share price dropped further to 25Php/share, you continue to invest in spite of the drop because you can buy 1000php/25php/share= 40 shares. Come March, while the share value continue to drop, the total number of shares you already have is 10+20+40= 70 shares. Net value is 70 shares x 25/share = 1750 php. Again, if you sell it at this time, you lose as your total investment is at 3000 Php but your share value is only 1750. DO NOT SELL at a LOSS.
Come April, you invest again 1000Php and the share price kick up to 50/share. You can buy again 20 share which will make your total investment at 4 months x 1000Php/month = 4000Php and your total number of shares in 4 months is 10+ 20+ 40+ 20 = 90 shares. Your total share value is 90 shares x 50Php/share = 4500Php. So at this point you can realize a gain of 4500Php- 4000Php = 500Php or about 12.5% gain in 4 months.
So, Money Cost Averaging only works if you have consistent investments. If you just put your money one time hoping that it will earn, say you just put 1000Php in January, by April, if you sell it at 50Php/share you still lose 50%, but if you follow the Money Cost Averaging technique, you would have earned 12.5% on the same market trend.
If you want to learn more about investing, just give us a call and we will be more than happy to assists you.
Happy Investing...
God bless us all...
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