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How to Buy Low, Sell High

Dhirendra Kumar

You always ask yourself the same crucial question -- am I going to be a buyer or a seller of stocks/mutual funds over the next few years? And as a buyer, you want to buy low; a market drop can be a terrific opportunity to do just that. Yet, following a market drop, many erstwhile buyers, rather than continuing to scoop up shares on the cheap, choose to become panic sellers -- despite no need to spend the invested money for perhaps another 10, 15 or 20 years. Panic selling only turns paper losses into real losses. Sellers might seriously regret their decision should the market bounce back quickly.

But investors are not to be blamed. Financial markets simply don't move in reliably predictable patterns. Yes, they move up and down. But market cycles aren't as regular as clockwork, and there is no surefire system to profit from "timing" these movements. Many investors -- expert and amateur -- have tried their hand at market-timing. Few, if any, have succeeded regularly for long. Remember, to profit from market-timing, you must be right twice: once in choosing when to sell and once in choosing when to buy. And to succeed, you must be right often enough to overcome any tax and transaction costs related to your moves. So how should you plan your investments? The best way is to indulge in regular monthly or quarterly investing, perhaps through a systematic investment plan.

If you are new to investing, systematic investment plan, also called rupee cost averaging, is a powerful technique, which allows you to take advantage of the price fluctuations (volatility) in the stock market: by investing the same rupee amount month in and month out. You buy fewer shares as prices rise and more shares as prices drop (that's essentially the buy low part). A more favourable average cost per share is generally the result.

Periodic disciplined investing can be an easy way to build your portfolio. You can employ this technique by setting aside a fixed amount of your savings every month to invest. When you invest the same rupee amount every time, rather than buy a specified number of shares, you buy more shares when the prices are low and less when the prices rise. The result: you can lower your average cost per share.

The table below demonstrates how this principle may work with a hypothetical mutual fund investment.

HOW SYSTEMATIC INVESTMENT PLAN WORKS
Date	Birla Advantage-NAV	Units Acquired
1/1/97	9.69	103.20
4/1/97	9.78	102.25
7/1/97	11.67	85.71
10/1/97	12.32	81.17
1/1/98	11.08	90.25
4/1/98	12.24	81.70
7/1/98	13.15	76.05
10/1/98	15.23	65.66
1/1/99	16.87	59.28
4/1/99	26.72	37.43
7/1/99	24.99	40.02
10/1/99	39.33	25.42
Total Number of Units		848.13
Average Price Per Unit		14.15
Total Investment		12000.00
Value of Investment (3/12/99)		43534.32
Annualised Return		104.26 %

SYSTEMATIC INVESTMENT PLAN RETURNS
Fund	Value of Rs 1000 p/m since 1/1/97	Annualised Return	Value of Rs 1000 invested every quarter since 1/1/97	Annualised Return
Birla Advantage	126281.87	106.85	43535.23	104.27
KP Prima +	95431.92	78.85	32704.85	77.03
Dhanvikas	45629.26	16.84	15237.75	16.07
Magnum Equity	77177.29	59.37	26122.43	57.42
Masterplus	42252.28	11.23	13970.09	10.07
Alliance '95	100121.40	83.45	34764.69	82.62

By funding your account with the same rupee amount regularly, you take advantage of market fluctuations by buying more fund shares when the prices are low, fewer when the prices rise. To realise the benefits of periodic investing, you must take a disciplined approach, continuing to purchase a fixed rupee amount in both rising and falling markets. You should consider your financial ability to stick to this approach. This strategy will not guarantee profit or protect against loss in declining markets.

If you are already using SIP, you're even smarter than you thought you were. According to our VR Fund Database, the average of the new equity funds with more than three years track record, would have yielded 15.72 pc per year over the 3-year period ended November 30, 1999. But a rupee cost average's (an investor who invested Rs 1000 per month in any of new equity funds with more than three years track record) annual return was far better, at an astounding 38 pc. And mind you, this period has witnessed one of the most volatile phases of the market.

Mutual Funds

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