Dollar-cost averaging (DCA) is an investment strategy that involves regularly investing a fixed amount of money at predetermined intervals, regardless of the asset’s current price. This approach is often used by long-term investors to mitigate the effects of market volatility and reduce the risk associated with trying to time the market.

How dollar-cost averaging works –

Regular Investments: With DCA, you invest a fixed amount of money (e.g., Rs. 1000) at regular intervals (e.g., monthly or quarterly) into a particular investment, such as stocks, bonds, or a mutual fund.

Buy More When Prices Are Low: The key principle behind DCA is that when the asset’s price is high, your fixed investment amount buys fewer shares, and when the price is low, your fixed investment amount buys more shares. This helps you avoid making large lump-sum investments at unfavorable times.

Averaging Over Time: Over time, your investments will result in an average purchase price. Since you buy more shares when prices are low and fewer shares when prices are high, your average cost per share tends to be lower compared to trying to time the market and making sporadic investments.

However, it’s important to note that DCA doesn’t guarantee profits or completely eliminate risk. Markets can go up and down, and DCA doesn’t offer protection against long-term bear markets. Additionally, transaction costs associated with regular investments can eat into returns if not carefully considered.