Lump-Sum Investment or Periodic Purchases?
Most mutual fund companies give you the choice of either making a lump-sum investment OR periodic investments.
Since unit prices fluctuate over time, both up and down, periodic investments allow you to benefit from price variations. Periodic investments can provide you with:
Peace of mind
Consider an example: You invest $1000 in a fund whose units are priced at $10 on the date of purchase and you receive 100 units. One month later, the unit price declines to $9.50! Had you waited, you could have received more units (105.26) for the same investment ($1,000). But how could you have known that the price would fall?
With a periodic investment strategy, you do not need to figure out the right time to make an investment.
Usually, you determine the amount and frequency of your investments. You can also usually modify the amount and frequency at any time to take into account changes in your professional, family or financial situation.
At the expected date, the amounts to be invested will be automatically transferred from your account. Everything is done for you!
Easier method for contributing to your RRSP
With a periodic investment strategy, you can contribute easily to your RRSP without stretching your budget. This is not rocket science! It is much easier to contribute $100 monthly rather than hastily trying to put together the total contribution in February!
Moreover, by investing throughout the year, you benefit from a longer period of tax-sheltered growth. For more details, consult our Retirement Planning section.
When you make periodic investments, the amount remains the same. So you receive more units when prices are low and fewer when prices climb. However, either way the average cost will generally turn out to be advantageous.
Example: You invest $100 per month in a fund that is priced at $10 a unit at the beginning of the year. As shown in the table below, the price may vary from one month to another with a low of $8 and a high of $11.
At the end of the year, the average cost per unit is $9.06 compared with $10 at the beginning of the year! This demonstrates the benefits of dollar-cost averaging.
Since returns are calculated using average costs, this is a winning strategy!
|Month||Unit price||Periodic investment ($)||Number of units purchased|