Automatic Investment Plan
Automatic investing, also known as dollar-cost averaging, represents a mutual fund installment-purchase plan. It is an easy and efficient method of increasing your investment over the time through the use of mutual funds.
This type of investing is suitable of beginner investors who don't possess large amounts of money. Additionally, many companies greatly reduce the initial amount of investment in case the investors sign for automatic investing.
Automatic investing eliminates the need to forecast the fluctuations of the market. It represents a disciplined way of investing small parts of income regularly. Thus, the fear of purchasing a mutual fund that is experiencing its peak is greatly reduced.
How Automatic Investment Works?
Under automatic investing, fixed dollar amounts of mutual funds are purchased regularly, for example each month or quarter. This allows for the acquisition of a large amounts of shares when the prices are favorable and the vice versa. Therefore, you will gain profits when the time comes to sell the shares you have acquired when the price exceeds the incurred costs for purchasing the same shares.
Automatic Investing Advantages
The major advantage of automatic investing is that the average cost of acquiring the mutual fund is always lower than the price of the mutual fund at which it was purchased. Automatic investing represents a long-term investment technique, which relies on the increase in the stock market. Another benefit of automatic investing is the elimination of complex economic, market and interest rates analysis. The key lies in the regular investment of fixed amounts of money regardless of the attitude of the shares.
Additionally, automatic investing leads to disciplined investment attitude that provides for the long-term growth of the financial portfolio you have established.
Shortcomings of Automatic Investment
Unfortunately, automatic investing doesn't provide any guarantees against losses in declining markets. Additionally, in declining market conditions, profits are not ensured. What is more, no guarantee is given against losses in case you decide to terminate your dollar-cost average program when the cost of your account is greater than the value. Automatic investing is most beneficial in the long term. Additionally, you should carefully examine your ability in financial terms to procure stocks in low price conditions.
In order to avoid sales commission payment, you can use no-load mutual funds by making periodic investments of small dollar amounts. An arrangement of the transference of monthly withdrawals from your bank account to the fund account can be made.
Since one of the most distinct characteristics of mutual funds is their liquidity, they can facilitate the getting of your money back the way it is put in.
Check writing possibility is now one of the most widely presented services by many money market mutual funds and some other fixed-income funds are starting to offer it as well. By using this service you are allowed to write checks that are covered by the money from your fund account. These checks may be used for what ever purposes you consider appropriate and even for further investments.
Telephone exchange privileges are offered to those investors who possess shares of money market fund and a stock fund of one and the same family of funds. This means that you can simply call your mutual fund company and ask for the redemption of a particular amount of money from your stock fund. As a result the money will be transferred to your money market fund and you can use them for check writing purposes.
In order to avoid fraudulent and unauthorized uses, many companies require the redemption to be executed in writing, which is accompanied by the so called signature guarantee, which can be obtained from every commercial bank. Redemptions can be accompanied by fees and other charges, which are clearly stated at the prospectus.
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