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Value averaging Investment Plan

Posted on 12/13/2009 02:12:00 PM by Abhijeet Bhagat

V.I.P in Investment


Value averaging Investment Plan
(Indian Context)



Most of the investors in the share market are aware of S.I.P(Systematic Investment Plan). They also know the merits of the SIP. Disciplined investment, good returns and very easy to invest. Recently  the cancellation of entry load charges has almost nullified the investment charges in SIP. 

Although the fact that SIP is giving good returns but there is ample of scope for improvement in the SIP's process of investment as per the experts. Actually speaking owing to the fact that investor invests a fixed amount in SIP per month it lacks flexibility. Whether the market is going up or down a fixed amount is always invested. In a nutshell we cannot match our timing with the share market to take advantage of share markets ups and downs. Probably that is the reason why some people also call  SIP as lazyman's farming.

When the Market is up and the NAV(Nett Asset Value) of the mutual fund is dearer then the monthly investment in SIP should reduce and when the NAV is cheaper the the investment should be more so that you purchase more units.If this happens then you get more value for your investment in the market. 

Exactly the same principle explained above is applied to the improved SIP called "Value Averaging Investment(VIP)". VIP as a concept was proposed by Proff. Michael Edelson from Harvard university and developed further. According to Edelson to improve investor's portfolio only continuity  in investment does not suffice rather with continuity the timing of the market should also be matched. With VIP one should get all the advantages of SIP but he should also be matching the timing in the market. VIP is very popular in other countries but now its also available in India.

Some Salient points of VIP.
  1. Fixed monthly investment same like SIP.
  2. Investment on a fixed date of month.
  3. Whenever NAV goes up then the monthly investment will lower and vice-versa.
  4. It is quite likely that when the NAV is quite high then zero investment is made.
  5. The Investor has to decide the 'maximum debit' which he can invest in a particular month. e.g. if the investor opts for a monthly investment of Rs. 5000 /month and his maximum debit is Rs. 10000/- then in a given month the investment can range from 0-10000.
The following table depicts the advantages of investment in VIP.




Month


Fund
NAV



VIP


SIP


Investment


No. Of Units


Investment


No. Of Units


Jan


10


2000


200


2000


200


Feb


15


1500


100


2000


133.33


Mar


20


0


0


2000


100


Apr


15


1500


100


2000


133.33


May


6


6000


1000


2000


333.33


June


3


6000


2000


2000


666.67

Total

17000

3400

12000

1566.66


Though the above table shows that both the investments looks good calculating the average cost of Unit we find:
investment in VIP : Average cost per unit=Rs.5 i.e. 17000 /3400 and
investment in SIP : Average cost per unit=7.66 i.e.12000/1566.66

VIP is new in India and benchmark company has launched its 'S & P CNX 500 Fund' www.benchmarkfunds.com


Suggested Reading Further :Value averaging








2 Response to "Value averaging Investment Plan"

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Ajay Says....

This is cool.
People like me can not watch my portfolio regularly. Is there any restrictions as to only a category of funds can be applied for VIP or all the mutual funds are covered?

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Thinking lot.... Says....

yes Value Averaging Investment is really in improved version of SIP... check out how
http://2bnamed.blogspot.com/2010/02/value-averaging-investment-vip-improved.html

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