Making investment under stock market via Systematic Investment Plan (SIP) has been proved successful strategy to play safe in volatile nature of stock market. This popularity of SIP between investors, made mutual funds to come up with an advance version of SIP called as VIP.
VIP stands for Value Averaging Investment Plan, it is relatively a new method of investing in the equity market. Few mutual funds have already launched this investment option and it is expected to gain more popularity soon as it is designed as an advance form of SIP.
If you are investing under mutual funds and equities regularly through SIP and looking for a strategy which allows you to invest more when markets go low and invest less when markets go high. So here is the investment strategy for investors to invest regularly like SIP but by overcoming its disadvantages.
What Is Value Averaging Investment Plan (VIP)?
In case of VIP, investors set their target portfolio value that they desire to achieve over a certain period of time and targeting their portfolio value, they keep on adjusting their contribution month on month. In simple words, investors can adjust their monthly contribution depending on last month performance of their funds. As VIP works on a simple rule i.e invest more in case of market fall and invest less in case of market rise to achieve the anticipated return.
VIP is an advanced investment strategy where monthly investment amount varies month on month depending on the market performance. Unlike SIP where monthly contribution remains constant. VIP allows investors to change their monthly contribution depending on the market performance. Which means, investors can raise your monthly contribution when they find their last month returns were lesser than expected and decrease the same when last month return were more than expected.
How Value Averaging Investment Plan (VIP) Works?
For Example:- An investor targets to invest Rs 1,20,000 (Rs 10,000 pm) over an year to his mutual fund portfolio with 12% pa (i.e 1% pm) expected rate of return.
In the First Month :- Investor invested Rs 10,000.
In the Second Month :- After reviewing the fund value of his last month investment, he realized the value of his fund rises 2% i.e Rs 12,400 (Increase of Rs 2400). Which means his current fund value increased 1% more than expected so he will invest Rs 8,800 (i.e Rs 10,000 – Rs 1200) in the second month.
In the Third Month :- After reviewing the fund value of his investments, he realized the value of his fund reduced 1% i.e –1200 Rs 21,200 (decrease of Rs 1200) so he invested Rs 11,200 (instead of Rs 10,000) in the third month.
So looking at the above example one can easily understand the investment strategy of VIP where investors can increase or decrease the next month’s contribution to bridge the gap between the target value and the actual portfolio value of his funds.
Advantages Of Value Averaging Investment Plan (VIP)?
- It helps investors to time the market by increasing their monthly contribution when markets and low and reduce the same in case of markets are high.
- It helps investors to maintain a habit of regular investment.
- It generates better returns than regular SIP.
- It helps to reduce the cost of acquisition as compare to SIP.
- It helps investors to set a target and invest accordingly to achieve the same over a set period of time.
Disadvantages Of Value Averaging Investment Plan (VIP)?
- Monthly investment amount required to invest is highly unpredictable.
Although both investment strategies work for investors who do not want to invest in lump-sum but there are some major difference in both the investment strategies.
|Monthly contribution amount varies from month to month depending on the market performance.||Monthly contribution amount remains constant irrespective of the market performance.|
|The formula to calculate investment amount is Investment Amount = Target Portfolio Value – Actual Portfolio Value||Investment amount remains fixed.|
|It follows a simple investment strategy of investing more when market is low and invest less when markets are high.||It follows a investment strategy of investing standard amount every month.|
|It works on value averaging investment methods||It works on cost averaging investment method.|
|VIP requires more investor participation||SIP requires lesser investor participation|
|Investor can set his target and can work towards his final return.||Final return in case SIP is not known to investor.|
Who offers the VIP?
Benchmark mutual fund is the only AMC offering VIP in S&P 500 Fund. Also there is FundsIndia where you can do VIP in different funds.
VIP allows investors to invest higher amount when markets go down and invest lesser amount when markets go up. This should be an ideal investment strategy of an investor. As predicting market condition for an investor is not possible, VIP helps investors to sync the investment amount with the market movements. Some real time studies also proved the performance of VIP is far better than regular SIP.
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