Being able to reinvest your distributions
to buy additional shares is another advantage of investing in
mutual funds. You can choose that option when you open a new account,
or at any time while you own shares. And, of course, you also
have the option to receive your distributions if you need the
income the fund would provide.
By investing regularly, you build the investment
base on which future earnings will be able to accumulate, a process
known as
compounding.
The more you have invested, the greater your potential for future
growth. And because the fund handles the process, rolling over
distributions into new shares as they are paid, you don't
have to budget for investing or remember to write the check.
Dollar cost averaging
When you reinvest, you're using a strategy
called
dollar
cost averaging.
By adding a similar amount of money on
a regular basis you can reduce your cost per share in the fund
below the actual average cost of a share over the period you invest.
But for the strategy to work, you must invest
the same amount of money whether the fund rises or drops in value.
Because you're buying more shares at the lower price and
fewer shares at the higher price, you may be able to reduce your
average cost per share.
However, there's no guarantee you'll
make money with dollar cost averaging. In fact, if the fund price
declines and doesn't bounce back eventually, you could lose
some of your investment. But in general, dollar cost averaging
can reduce the risk that you'll invest all of your assets
at the market peak.
