We all know about Systematic Investment Plans (SIPs). By now volumes have been written on it. As compared to it Value Averaging Investment Plan (VIP) is relative new.
Difference in SIP Vs VIP
Systematic Investment Plans (SIPs) is an investment strategy, where you largely place sums at regular intervals in mutual fund schemes.
The one advantage of these SIPs is that they allow you to invest at regular intervals, given the fact that you cannot time the markets. SIP's are a fixed sum every month.
VIPs can best be understood with an example. Let us say that you want a return of 1 per cent every month for Rs 10,000. So, after a month, you should have a return of 10,100. Now, if the value of the portfolio falls to Rs 9500, in the subsequent month, your installment will increase to make up the shortfall in the value as the net asset value of your fund has fallen.
So, in the subsequent month your installement will make up the shortfall, plus the drop in the first months returns as well.
What VIPs tend to do, is to allow you to set a fixed portfolio after a given period of time. So, if after 2 years, you want a portfolio of Rs 2 lakhs, you will adjust your instalments for losses and add less if you have made profits.
In the case of SIPs there is no adjustment whatsoever. You just place a fixed some every month and wait for the law of averages to fetch you returns.
SIPs or VIPs: Which to buy?
VIPs as a concept has still to catch-on in India. Bulk of the investment happens by way of SIPs. Individuals are happy to pay a fixed sum every month, irrespective of profits or losses.
VIPs as a concept is hardly heard off as most of the strategies of mutual fund houses has always focused on SIPs.
It is not as if one concept is better than the other. It is just your own needs, investment decisions and ability to provide more in cases of losses through VIPs.
We suggest that you stick with SIPs and when the markets fall dramatically increase the size of your SIPs.
Let us cite this with an example. Say you are investing a sum of Rs 10,000 and believe that the markets are fairly priced at current levels of Rs 27,800 points. If you see a serious crash of say about 10 per cent on the index, you can hike your SIPs. The amount of hike will depend on your own cash flows.