SIP or VIP in Equity Mutual Funds - which one works well for you?
While investing is a personal decision based on everyone’s unique situation, every financial plan will have some allocation to the 3 major asset classes: equity or stocks, debt or fixed income instruments, or precious metals like gold and silver.
But investing in the stock markets can be a challenge, what with the wild and unpredictable swings in share prices. To reduce the risk of investing “at the wrong time”, many investors have opted for a Systematic Investment Plan (SIP) or a Value Averaging Investment Plan (VIP): simple ways to invest your money in regular intervals
A SIP, or a Systematic Investment Plan, is a mode of investment whereby you, the investor, invests a pre-determined amount on a monthly basis, on a pre-determined date, into a particular mutual fund scheme. Today, it is the most common and conveniently chosen method of investing by retail investors.
Some of the best known SIP benefits are:
Benefit of Rupee Cost Averaging:
Since you're buying units every month, you'll be buying at dips and rises, so you are averaging your cost over the time period.
Benefit of Power of Compounding:
If started at an early age, SIP helps you to start investing to meet the greater expenses of your life. Saving a small sum of money regularly makes your money work with greater power of compounding with significant impact on wealth accumulation.
Helps you avoid panic selling:
SIP investors tend to scare less easily than lump sum investors when the markets fall - as they get the chance to buy low, and later when they want, sell high.
It's possible to start small:
You don't need a large amount of money to start an SIP, you can start with as little as Rs. 100/- and slowly build up your wealth.
Helps you avoid market timing:
An SIP effectively stops you from trying to time the market and inculcates automatic financial discipline into your investing method.
One Form, Multiple Regular Investments:
An SIP cuts down the paperwork you need to do. With just one form you can invest for 10 years or more into your chosen scheme.
An SIP is especially useful for salaried individuals who can save and invest a certain amount each month; however the benefits of SIPs apply to all investors.
Making investments in stock markets via Systematic Investment Plan (SIP) has been proved as a successful strategy which helps you to play safe given the volatile nature of stock markets.
Investment in a Value averaging Plan (VIP):
A Value averaging Investment Plan (VIP) is an investment strategy that works like an SIP – you invest on a pre-determined date, into a fixed mutual fund scheme, thus achieving the purpose of disciplined investing and following the teachings of finance gurus when they say 'Buy Low'.
But while in an SIP the amount is fixed and units may change, in a VIP you have a target value of your portfolio, which increases by say Rs. x,000 per month, and you invest the difference between the current value of your portfolio, and the targeted portfolio investment value.
For example, suppose you set a target level of Rs. 5,000 per month. You invest for 2 months (Rs. 10,000 invested totally) and the market falls. So the current portfolio value of your Rs. 10,000 invested is now Rs. 8,500. To make up for this fall, you invest Rs. 5,000 for your third month's investment, and also an additional Rs. 1,500 (Rs. 10,000 minus Rs. 8,500). So in the third month, when the market has fallen, you invest Rs. 5,000 + 1,500 i.e. Rs. 6,500, instead of Rs. 5,000.
Similarly, if the market has risen, and your Rs. 10,000 has grown to Rs. 12,000, then when the time comes to make your third month's investment, you will not invest Rs. 5,000, but instead Rs. 3,000 (Rs. 5,000 - Rs. 2,000 = Rs 3,000– the profit you have made due to the market rise). In essence, the VIP bridges the gap between the target portfolio value, and the actual current portfolio value. It buys less when the markets are high and more when the markets are low.
The benefits of this approach is very apparent:
If the markets go down, you invest more and if the markets go up you invest less. So if there is value to be held, and if you can buy on the cheap, value investment plans will help you do this. And if the market rises and investments become 'expensive', the value investment plan strategy will ensure you do not invest as much. It might even ask you to redeem some of your investment, booking profits in the process.
By buying more when markets go down, you are also benefiting from the concept of rupee cost averaging. Investing regularly also inculcates financial discipline, and again you don't have to worry about too much paperwork.
One thing you need to keep in mind though is that you need to have sufficient cash flows to meet the investment that will be required in market dips, as at these times, you will be investing more – sometimes much more.
Courtsey : My additional inputs on the base article by Quantum Mutual Fund knowledge Series
But investing in the stock markets can be a challenge, what with the wild and unpredictable swings in share prices. To reduce the risk of investing “at the wrong time”, many investors have opted for a Systematic Investment Plan (SIP) or a Value Averaging Investment Plan (VIP): simple ways to invest your money in regular intervals
A SIP, or a Systematic Investment Plan, is a mode of investment whereby you, the investor, invests a pre-determined amount on a monthly basis, on a pre-determined date, into a particular mutual fund scheme. Today, it is the most common and conveniently chosen method of investing by retail investors.
Some of the best known SIP benefits are:
Benefit of Rupee Cost Averaging:
Since you're buying units every month, you'll be buying at dips and rises, so you are averaging your cost over the time period.
Benefit of Power of Compounding:
If started at an early age, SIP helps you to start investing to meet the greater expenses of your life. Saving a small sum of money regularly makes your money work with greater power of compounding with significant impact on wealth accumulation.
Helps you avoid panic selling:
SIP investors tend to scare less easily than lump sum investors when the markets fall - as they get the chance to buy low, and later when they want, sell high.
It's possible to start small:
You don't need a large amount of money to start an SIP, you can start with as little as Rs. 100/- and slowly build up your wealth.
Helps you avoid market timing:
An SIP effectively stops you from trying to time the market and inculcates automatic financial discipline into your investing method.
One Form, Multiple Regular Investments:
An SIP cuts down the paperwork you need to do. With just one form you can invest for 10 years or more into your chosen scheme.
An SIP is especially useful for salaried individuals who can save and invest a certain amount each month; however the benefits of SIPs apply to all investors.
Making investments in stock markets via Systematic Investment Plan (SIP) has been proved as a successful strategy which helps you to play safe given the volatile nature of stock markets.
Investment in a Value averaging Plan (VIP):
A Value averaging Investment Plan (VIP) is an investment strategy that works like an SIP – you invest on a pre-determined date, into a fixed mutual fund scheme, thus achieving the purpose of disciplined investing and following the teachings of finance gurus when they say 'Buy Low'.
But while in an SIP the amount is fixed and units may change, in a VIP you have a target value of your portfolio, which increases by say Rs. x,000 per month, and you invest the difference between the current value of your portfolio, and the targeted portfolio investment value.
For example, suppose you set a target level of Rs. 5,000 per month. You invest for 2 months (Rs. 10,000 invested totally) and the market falls. So the current portfolio value of your Rs. 10,000 invested is now Rs. 8,500. To make up for this fall, you invest Rs. 5,000 for your third month's investment, and also an additional Rs. 1,500 (Rs. 10,000 minus Rs. 8,500). So in the third month, when the market has fallen, you invest Rs. 5,000 + 1,500 i.e. Rs. 6,500, instead of Rs. 5,000.
Similarly, if the market has risen, and your Rs. 10,000 has grown to Rs. 12,000, then when the time comes to make your third month's investment, you will not invest Rs. 5,000, but instead Rs. 3,000 (Rs. 5,000 - Rs. 2,000 = Rs 3,000– the profit you have made due to the market rise). In essence, the VIP bridges the gap between the target portfolio value, and the actual current portfolio value. It buys less when the markets are high and more when the markets are low.
The benefits of this approach is very apparent:
If the markets go down, you invest more and if the markets go up you invest less. So if there is value to be held, and if you can buy on the cheap, value investment plans will help you do this. And if the market rises and investments become 'expensive', the value investment plan strategy will ensure you do not invest as much. It might even ask you to redeem some of your investment, booking profits in the process.
By buying more when markets go down, you are also benefiting from the concept of rupee cost averaging. Investing regularly also inculcates financial discipline, and again you don't have to worry about too much paperwork.
One thing you need to keep in mind though is that you need to have sufficient cash flows to meet the investment that will be required in market dips, as at these times, you will be investing more – sometimes much more.
Courtsey : My additional inputs on the base article by Quantum Mutual Fund knowledge Series
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