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The benefit of investing in ETFs and unit trusts regularly

by , 09 November 2015

One of the advantages of investing in exchange traded funds (ETFs) and unit trusts is you can opt to invest monthly instead of via a lump sum as you would if you invested in shares.

So why is this an advantage?

Let's take a closer look…


The advantage is rand cost averaging

 
By regularly investing on a monthly basis into ETFs or unit trusts, you benefit from rand cost averaging.
 
By drip feeding your money into the stock market via these funds, it takes away the risk of investing a lump sum the day before the market crashes.
 

What is rand cost averaging?

 
Rand cost averaging works like this. You invest a set amount in one or more funds on a monthly basis. 
 
This means you’ll buy more ETFs or more units in a particular fund when prices are low and you’ll buy less when prices are higher.
 
Over time, your average cost of buying will smooth out the difference between high and low prices.
 

An example of rand cost averaging

 
Let’s say you decide to invest R100 a month into a unit trust. 
 
In the first month, your R100 buys you 7.69 units when the unit price was R13.00. In the second month, your R100 buys you 14.29 units when the unit price was R7.00.
 
If you add these units together, you get 21.98. Divide this figure by the R200 you invested. This means the average price you paid was R9.10 per unit. This means you saved 9% on the average unit price of R10.00.
 
The benefit to you is that the longer you regularly invest in funds, the more likely it is you’ll buy into the funds at a variety of prices. Rand cost averaging smooths out the ups and downs of the stock market.
 
So there you have it. The benefit of investing in ETFs and unit trusts regularly.
 
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The benefit of investing in ETFs and unit trusts regularly
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