• Exact Date: Once you have decided the periodicity, you need to decide the exact date on which you would invest. It can be the 1st of every month, 5th of every month, 23rd of every month - anything that is convenient to you.

  But please bear in mind - you need to invest exactly on this date every month (or every period, if it is different from a month). If this date falls on a holiday, you can invest on the next working day.

• Amount: Decide the amount that you would invest every month. This amount should be out of your disposable income, and should be such that you can easily spare it for investment every month, without fail.
• Where to invest: Decide where you would invest your money. It can be shares of a company, or a mutual fund. Remember - Once you choose this, you would be investing in it every month.

  It is best and easiest to do Cost Averaging using a Systematic Investment Plan (SIP) of a Mutual Fund (MF). (Please read "A rupee a day, keeps worries away" to know more about this).

Let's discuss this in detail.

Where to invest?

Now, this is a very important question! If you end up investing in the wrong asset, you would be putting good money after bad, and for a long time! So, it is very important to choose the correct asset for investing.

Ideally, you should choose a company which is expected to grow for some time to come, a company that is not in a stagnant industry or market. The reason is that the share price of a company would go up over the long term only if the company is growing. (Please read "Stocks - The winning bet for the long term" to find out more on this).

But there are many practical difficulties in investing in shares for cost averaging.

1. Lack of Fractional Ownership: There is no fractional ownership in shares. That is, you can own shares only in whole numbers - you can't buy 25.6 shares of ITC! When you are investing a fixed sum, most of the times, you would need to buy a fraction.

   For example, in April, you need to buy Rs. 5000 / Rs. 210 per share = 23.81 shares. But you would have to buy 24 shares, thus exceeding your limit.

   This is not very desirable in Cost Averaging.

2. Cost of Shares: Many good shares quote at a price which is in hundreds or thousands of Rupees per share. If you decide to invest a modest sum every month, like Rs. 5000, how many shares can you buy?

   For example, Reliance Industries quotes at around Rs. 2300. So, even if the price fluctuates, you would either end up buying 2 shares every month, or would spend more than Rs. 5000 every month!

   Again, this distorts the principles of Cost Averaging.

What does this mean? What's the point in learning about a good technique, if you can't practice it, right?

Well, there is a very good and convenient way to practice Cost Averaging - and that is using a Systematic Investment Plan (SIP) of a Mutual Fund (MF). Please read "A rupee a day, keeps worries away" to know more about this.

Additional Tip

I strongly discourage distorting the principles of Cost Averaging - you should invest the same amount in the same asset every period. But there is one scenario in which I do recommend distorting it.

And this is when the markets are low. For long term investors, a dip in the market due to non-fundamental reasons presents a very good buying opportunity (Please see "Stock Market Crash - What you should do now" for more on this).

During such periods of irrational behaviour of the market, long term investors should invest even more. When sanity returns and the markets go up again, such investments can give phenomenal returns.

The same principle applies even to investments being made for Cost Averaging. When the market overreacts to some bad news or event, and goes down for non-fundamental reasons, you can invest more than your regular monthly amount - you can top up your monthly investment! And this would further reduce your average cost of acquisition!

Happy investing!!

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