When you invest the same amount each time in a market with fluctuating prices, you end up buying fewer units when prices are high and more units when prices are low. As a result, the average purchase price tends to be smoothed out compared with buying everything in a single lump sum.
How it works
For example, if you buy a fund with a fixed amount of money every month, you will purchase more units in months when the price falls and fewer units in months when the price rises. Regular installment investment programs are built on this idea.
Points to keep in mind
Because dollar-cost averaging relies on price fluctuation, a lump-sum investment can turn out to be more advantageous in a steadily rising market. Also, if the investment itself keeps losing value over the long term, lowering the average purchase price does not necessarily prevent a loss.