When should you average costs?

In uncertain times, use the strategy carefully, and only with low-beta stocks, say experts.

In falling and uncertain market conditions, stock investors are always scared. And, there are many advisors and strategies.

For instance, some just want to sit back and wait out the troubled times - sometimes, the best policy. Others feel they should exit their holdings, typically called cutting losses. And, some brave ones want to continue buying at lower levels or do cost-averaging, because the valuations are too attractive.
 

DON’TS:

* Buy high-beta stocks

* Buy shares of fundamentally weak companies

* Buy mid-cap or small-caps in a sector

DO’S:

* Buy low-beta stocks

* Buy large-caps in a sector

* Buy contra calls

The last approach has to be used with a lot of caution. Cost averaging involves doing steady investments through time, much like a systematic investment plan in mutual funds. The only difference: Here the investor can take a call on when to invest, unlike an SIP when monthly or quarterly investments have to be made according to an earlier-stipulated date.

Many market experts are favouring this method.

Pankaj Pandey, head of research at ICICI Direct, says investing in a staggered manner is the best way to invest in stocks instead of lump sum investments at the moment, due to the volatility in the markets. He says one should buy or sell every three months and not be in a hurry to put in money in markets at current levels. If you churn more too much, there is a likelihood that it will hurt because you may not get the stock at a good level.

Assume you already own 100 shares of a company at Rs 500 each. Your total investment would be Rs 50,000. If the price of the stock falls to Rs 400 and you buy another 100 shares, then you have spent another Rs 40,000. Now you own 200 stocks of the company at Rs 90,000. But your average cost has come down from Rs 500 to 450.

However, Alex Mathew, head of research at Geojit BNP Paribas Financial Services, advises one to use this strategy carefully and over a time horizon of at least five years.

The biggest advantage of cost averaging is that the investments get spread over different market conditions and levels of market indices and you as an investor need not worry about timing the market.

He says that in such volatile times, one should reduce holding in high-beta stocks and increase holding in low-beta stocks.

"This is because low beta stocks do not move as violently as the benchmark indices during volatile times," he says.

Investing in a staggered manner in bluechip stocks is a good option.

And, be selective when churning your holding in mid-cap scrips. Increase your holding in fundamentally strong mid-cap scrips that are trading near their yearly lows.

But, be careful. When you increasing the holdings in a stock, make sure you know why the share price is falling. It may be due to the company's weak fundamentals or if it has serious problems.

On the other hand, there are certain industries where one can continue buying, due to good fundamentals and opportunities. Especially the large-caps in these sectors. If you are a contra player, such times might be interesting.