Long-term investment in equities certainly yields good returns. However, the journey can be bumpy with bulls and bears making their appearances intermittently. Market pundits, therefore, recommend regular and staggered investment. So far a systematic investment plan (SIP), which gave investors the benefit of rupee cost averaging, was considered by far the best way for making such staggered investments. However, an even better approach exists called value averaging investment plan (VIP). This will help you augment your returns by a few percentage points (compared to an SIP plan). While as an investment technique VIP has been around for some time, Benchmark Mutual Fund has become the first company in India to offer this plan with its index fund —S&P CNX 500 Fund.
How is VIP different from SIP?
SIP. In a systematic investment plan, you invest a fixed amount every month. This amount divided by the net asset value (NAV) of the fund determines how many units you get each month. When the markets rise, the NAV rises and you get fewer units, and vice versa. In this way, the investor averages out the purchase price of units. This concept is known as rupee cost averaging.
VIP: Value investment averaging plan too is a regular investment plan, the only difference from an SIP being that here the amount of investment made varies from month to month. In a VIP, a target rate of return is fixed. The monthly investment that you make is calculated in such a way that this rate of return is achieved every month. When the market is declining, you will be expected to invest more, and vice versa.
How is VIP different from SIP?
SIP. In a systematic investment plan, you invest a fixed amount every month. This amount divided by the net asset value (NAV) of the fund determines how many units you get each month. When the markets rise, the NAV rises and you get fewer units, and vice versa. In this way, the investor averages out the purchase price of units. This concept is known as rupee cost averaging.
VIP: Value investment averaging plan too is a regular investment plan, the only difference from an SIP being that here the amount of investment made varies from month to month. In a VIP, a target rate of return is fixed. The monthly investment that you make is calculated in such a way that this rate of return is achieved every month. When the market is declining, you will be expected to invest more, and vice versa.
Consider this: you plan to invest Rs 1,000 a month and expect an annual return of 15 per cent. Say, for instance, at the end of month three your portfolio value is Rs 3,500 and the expected portfolio value for the fourth month is Rs 4,027. Therefore, next month you will invest only Rs 527 (difference between target and actual portfolio value).
Difference in returns. This technique is superior to SIPs as it gives you the weighted average. The cost incurred in acquisition of units is less compared with that of an SIP. We took two periods: Jan 2006 to Jan 2007 and Jan 2008 to Jan 2009. During calendar year 2006, markets were rising. During this phase, an investment of Rs 60,000 through SIPs in an equity fund would have given you Rs 69,878 in return — a gain of 16 per cent. During the same period, a VIP with a target return of 15 per cent would have given you a higher return of 19.5 per cent.
Next, we looked at returns during the bear phase of January 2008-09. A lump sum investment of Rs 60,000 would have yielded -49 per cent return; an SIP would have given a return of -18.70 per cent while a VIP would have given -19.3 per cent return.
From Jan 2008 till May 1 this year, the return on a lump sum investment would have been
-40 per cent. An SIP of Rs 5,000 a month would have yielded -22 per cent return and a VIP, 0.67 per cent return.
Difference in returns. This technique is superior to SIPs as it gives you the weighted average. The cost incurred in acquisition of units is less compared with that of an SIP. We took two periods: Jan 2006 to Jan 2007 and Jan 2008 to Jan 2009. During calendar year 2006, markets were rising. During this phase, an investment of Rs 60,000 through SIPs in an equity fund would have given you Rs 69,878 in return — a gain of 16 per cent. During the same period, a VIP with a target return of 15 per cent would have given you a higher return of 19.5 per cent.
Next, we looked at returns during the bear phase of January 2008-09. A lump sum investment of Rs 60,000 would have yielded -49 per cent return; an SIP would have given a return of -18.70 per cent while a VIP would have given -19.3 per cent return.
From Jan 2008 till May 1 this year, the return on a lump sum investment would have been
-40 per cent. An SIP of Rs 5,000 a month would have yielded -22 per cent return and a VIP, 0.67 per cent return.
Advantage.
Analysis of the last ten years suggests that VIP generates higher returns compared with SIP as the cost of acquisition is lower with the former method.
Disadvantage. A major disadvantage is the variable installment. Instalments can vary from nil to the upper limit set by the investor. When markets are up and the portfolio size is greater than the target portfolio, an investor will not have to invest anything. On the other hand, if the markets are down and hence the value of the target portfolio, you will have to dish out extra cash to match the target rate of return.
Besides, if the markets move in one direction, whether up or down for a long period, the return generated by VIP can be inferior to SIP.
Benchmark’s scheme. VIP is available only with S&P CNX 500 Fund. The fund allows a minimum starting investment of Rs 2,000 and has set a default target return of 15 per cent. The amount invested will be used to calculate the target portfolio amount. You will also have to suggest an upper limit up to which fund manager can withdraw money. The fund doesn’t charge any entry load. However, exit before a year attracts a penalty of 1.50 per cent of the fund value. There is no exit load after three years.
Disadvantage. A major disadvantage is the variable installment. Instalments can vary from nil to the upper limit set by the investor. When markets are up and the portfolio size is greater than the target portfolio, an investor will not have to invest anything. On the other hand, if the markets are down and hence the value of the target portfolio, you will have to dish out extra cash to match the target rate of return.
Besides, if the markets move in one direction, whether up or down for a long period, the return generated by VIP can be inferior to SIP.
Benchmark’s scheme. VIP is available only with S&P CNX 500 Fund. The fund allows a minimum starting investment of Rs 2,000 and has set a default target return of 15 per cent. The amount invested will be used to calculate the target portfolio amount. You will also have to suggest an upper limit up to which fund manager can withdraw money. The fund doesn’t charge any entry load. However, exit before a year attracts a penalty of 1.50 per cent of the fund value. There is no exit load after three years.
What should you do
Investors should certainly adopt this plan, though its availability is at present an issue. “I would recommend this plan. Since the fund gives weighted average return, it scores over a normal SIP. If you are not working on a tight budget and can afford to pay variable installments, go for it,” says Surya Bhatia, a Delhi-based financial planner. “The fund might give less returns in a unidirectional market. However, markets are unlikely to behave this way in the long term,” he adds.
To get the best out of this plan, stick to it for at least three years. u
Investors should certainly adopt this plan, though its availability is at present an issue. “I would recommend this plan. Since the fund gives weighted average return, it scores over a normal SIP. If you are not working on a tight budget and can afford to pay variable installments, go for it,” says Surya Bhatia, a Delhi-based financial planner. “The fund might give less returns in a unidirectional market. However, markets are unlikely to behave this way in the long term,” he adds.
To get the best out of this plan, stick to it for at least three years. u
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