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Created on 29.03.2018

How you can benefit from the cost averaging effect with the funds saving plan

Even professionals cannot accurately determine the ideal time to make investments. However, fluctuations on the markets can be evened out in the longer term by making regular payments into an investment, such as a funds saving plan. This is due to the cost averaging effect. Find out here how it works.

Let’s assume you are investing CHF 100 a month into a fund over a longer period of time. If the price of a unit in the fund (the unit price) is low, you automatically obtain a larger number of units. If the prices are higher, you receive fewer fund units accordingly. This means the average price you paid for all of your fund units is lower than if you had purchased all your units at the most unfavourable point of entry – but also higher than at the most favourable time. As a result,  investors reduce the risk of an “unfavourable” point of entry with high prices. They do not invest at the best time either but reduce the risk of only buying units when the price is high.

Buying units regularly with a funds saving plan

A funds saving plan can also help you to invest a fixed amount every month in a disciplined way. The big advantage is that it remains flexible. Investors decide for themselves how often they make payments which can also usuallly be skipped. The funds saving plan is therefore a useful tool for regular saving and ideal for accruing assets over the long term.

The following graphic shows an example of how you can benefit from the cost averaging effect with the funds saving plan: you automatically purchase fund units for CHF 100 a month and receive 6.33 units for CHF 600 after six months. If you had just purchased these 6.33 units on a particular day when the price was CHF 105 per unit, you would have paid CHF 664.65. If you had paid CHF 600 on the start date, you would only have received 6 units. The funds saving plan therefore enabled you to generate a return of CHF 64.65.

This example explains the cost averaging effect: a funds saving plan worth 100 francs is set up with six inpayments. The fund units you receive in return vary substantially. Sometimes you receive more for your money, sometimes less. This allows investors to minimize the risk of selling at an unfavourable time of entry.
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