Value Investment Plan- Investing regularly but with a difference!

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In the last few years the word “volatility” has become famous with most investors. The markets have been range-bound in the last couple of years & due to this many investors who invest regularly in the market especially through the ‘SIP route’ have seen their cost averaging not working out too well. This not due to any flaw with the SIP route,but due to nature of the market.

In a range bound market SIP or the investment term for it ‘Rupee Cost Averaging’ may not prove that effective. In such markets it is the ‘Value Cost Averaging’ method which proves efficient. SIP is not only a regular installment but also a fixed amount irrespective of the nature of the market.  Value Cost Averaging or VIP is where the amount is not fixed.

 

VIP value investment plan is something quite similar to what every investor really wants. VIP is a close cousin of SIP. Like SIP, VIP is a regular investment in mutual funds but the amount of investments is not fixed. This investment depends on the movement of the market i.e. one can invest more when the markets are down and less when the markets are up.

How does a VIP function?
In VIP the investor first decides how much he will invest in every month as like in the case of SIP. However the difference is seen from the second month of investment. The next month’s contribution is made depending on the shortfall or gain made on the total investment made.


For example -You decide to add Rs. 2,000/- every month to your Mutual fund portfolio. In the coming month if the market is bullish your investment of Rs. 2,000/-   will rise to say Rs 2,300/-. In SIP you would still invest Rs 2,000/- next month, but in VIP route you will only invest that much so that your total investment is Rs 4,000/-. Thus you need to invest only Rs 1,700/- (Rs. 2,000- Rs.3,00). Thus in the rising market your investment is less. However when the market is falling or say bearish your investment of Rs. 4,000 falls to Rs 3,800/-, at this point of time your next month’s investment amount will be Rs. 2,200/- (Rs.2,000+Rs.200) to make your fund Rs 6,000/-. Thus in a falling market your investments will be more.  In other words, you buy more units when the prices are low and you end up buying less units when the markets rising. Thus VIP follows the motto of "Be cautious when markets are aggressive and be aggressive when markets are cautious"


The Good Side
A value investment plan keeps the investor emotionally secure as he is investing less during a rising market and vice versa. It also disciplines his investment approach. Compared to a SIP in most cases VIP generates higher returns. A VIP not only reduces risk, but also offers investors reliable returns. The investment made is to achieve a target on a predetermined rate of return. The maximum and minimum contributions are also pre decided. The corpus is defined by the investor himself and the investments are done accordingly.

The Challenge
A VIP is not effective when the markets are moving in the same direction for a long period, thus a VIP is a good option only when the market is expected to be volatile. It is also not for short term goals. Another disadvantage to be faced by the investors is that the amount is very unpredictable depending on the markets. This gets difficult especially for a salaried person as he is not aware of the amount which will be debited from his salary as it varies every month.

Whatever may be the route chosen i.e. SIP or VIP it is very important you start saving regularly. If the markets are volatile you may shift to VIP & if the investment is for a long term in a bullish economy then opt for SIP. In both cases you are investing & in due time returns will appear.

 

By Namrata Shah.

The writer is working with FpGuru.com as a Financial planner.


Comments  

 
+1 #3 Himanshu 2012-02-04 05:28
Finally i have understood exactly how VIP works,
Thank You
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0 #2 Raj khanna 2012-02-04 05:26
Well explained.
Will keep this in mind when investing in mutual funds
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0 #1 Uttam Kumar Sen 2012-01-28 13:29
VIP is more effective compare to SIP in volatile market. Time horizon should be long term, at lest more than 5 years. The investment objective should be specific to a Goal.
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