Using cost averaging for mutual funds and UITF

Investing in the financial markets can be intimidating, especially for beginners. Market volatility, economic fluctuations and personal biases can significantly affect investment decisions and outcomes. Peso Cost Averaging (PCA) is an investment strategy that can help mitigate some of these challenges. This method involves regularly investing a fixed amount of money in a particular investment, such as mutual funds or Unit Investment Trust Funds (UITFs), regardless of the market conditions.

In this article, we will explore why PCA is a good idea for investors in the Philippines, focusing on mutual funds and UITFs.

PCA is an investment strategy where an investor commits to investing a fixed amount of money at regular intervals, typically monthly, into a particular financial asset or set of assets. This approach contrasts with lump sum investing, where an investor puts in a large amount of money all at once.

As such, PCA is designed to reduce the impact of volatility on the overall investment portfolio by spreading the investment over time.

Benefits of PCA

Reduces the impact of market Volatility. Market volatility is a significant concern for investors. Prices of mutual funds and UITFs can fluctuate due to various factors, including economic data, corporate earnings, geopolitical events and changes in interest rates.

PCA helps mitigate the risk of buying at market peaks by spreading purchases over time, thus averaging out the cost of investments. This approach can lead to purchasing more units when prices are low and fewer units when prices are high.

Promotes discipline in investing. Consistency is crucial in investing and PCA encourages investors to commit to a regular investment schedule, fostering a disciplined approach. This discipline can help avoid emotional reactions to market movements, such as panic selling during downturns or over-enthusiastic buying during market rallies.

By sticking to a predetermined investment plan, investors are more likely to stay the course and achieve their long-term financial goals.

Reduces the need for market timing. Attempting to predict the optimal times to buy and sell investments, is notoriously difficult even for seasoned investors. PCA removes the need for market timing by spreading investments over time, ensuring that the investor does not have to worry about the best times to enter or exit the market.

This can be particularly beneficial for novice investors who may not have the expertise or confidence to time the market effectively.

Lower psychological stress. Investing can be stressful, especially when markets are volatile. PCA can reduce this stress by providing a systematic and automated approach to investing. Knowing that investments are made regularly, regardless of market conditions, can help investors feel more in control and less anxious about short-term market fluctuations.

Accessibility and affordability. PCA makes investing more accessible and affordable for a broader range of investors. Instead of needing a large sum of money to start investing, individuals can begin with smaller amounts and gradually build their investment portfolio over time. This accessibility is particularly important in the Philippines, where many potential investors may have limited initial capital.

Mutual funds and UITFs are popular investment vehicles in the Philippines, offering diversification and professional management. Here’s how PCA can be effectively applied to these investment options.

Mutual funds

Regular Contributions. Investors can set up automatic deductions from their bank accounts to contribute a fixed amount to their mutual fund investments regularly.

Diversification. By investing in mutual funds, investors gain exposure to a diversified portfolio of assets, reducing the risk associated with individual securities.

Professional management. Mutual funds are managed by professional fund managers who make investment decisions on behalf of the investors, ensuring that the funds are managed efficiently.

UITFs

Flexibility. UITFs offer flexibility in terms of investment amounts and intervals. Investors can easily set up regular contributions to their chosen UITFs.

Variety of options. UITFs in the Philippines come in various types, such as equity funds, bond funds and balanced funds, allowing investors to choose funds that align with their risk tolerance and investment goals.

Transparency. UITFs provide regular reports and updates on the fund’s performance, helping investors stay informed about their investments.

Practical steps to implement PCA

Choose your investment. Select the mutual fund or UITF that aligns with your investment goals, risk tolerance and time horizon. Consider factors such as the fund’s historical performance, management team and fees.

Determine your investment amount and frequency. Decide how much you can comfortably invest on a regular basis and how often (such as monthly, quarterly). Ensure that the amount is sustainable within your budget.

Set up automatic investments. Arrange for automatic transfers from your bank account to your chosen investment fund. Many financial institutions and investment platforms in the Philippines offer automated investment services.

Monitor and review. Regularly review your investment to ensure it is on track to meet your goals. While PCA reduces the need for frequent adjustments, it is still important to stay informed about your investments and make adjustments if necessary.

Stay committed. Stick to your investment plan, even during periods of market volatility. Remember that PCA is a long-term strategy, and its benefits become more apparent over time.

PCA is a powerful investment strategy that can help investors in the Philippines achieve their financial goals with less stress and greater consistency. By regularly investing a fixed amount in mutual funds or UITFs, investors can benefit from reduced market timing risks, disciplined investing and the potential to accumulate wealth over the long term.

Whether you are a novice investor or an experienced one, PCA offers a practical and effective approach to building a robust investment portfolio in the dynamic financial markets of the Philippines.

Randell Tiongson is a registered financial planner at RFP Philippines. To learn more about financial planning, attend the 108th RFP program this July 2024. Email [email protected] or visit rfp.ph.