Systematic Investment Plan (SIP) and Value Investment Plan (VIP): A comparison
Those who invest in mutual funds regularly, or at least takes an interest about various mutual funds and their performances, must have heard the term SIP or Systematic Investment Plan. A systematic investment plans, as clearly conveyed by the name, is a process of investing comparatively smaller amounts of money on a regular basis (ideally per month or per quarter) into a particular mutual fund. There are mainly two benefits of systematic investment plans in mutual funds; on one hand you do not require a huge amount for the primary investment, on the second hand you do not need to time the market because by buying some units every month you can adjust the market volatilities. These basics, more or less, are known to all. Most financial experts want their clients, especially beginners, to go for SIPs. We all know that. What about Value Investment Plan or VIP?
Yes, we are still somewhat ignorant when it comes to value investment plans which is yet to become a buzzword in the Indian mutual funds market. Let us find out what is this VIP or value investment plan, how does it work, and whether it is better or worse than the popular SIPs. Keep reading!
What is a Value Investment Plan or VIP?
A Value Investment Plan or VIP is basically a variant of the Systematic Investment plan and they share some common principles as well. In SIPs, you are investing a fixed sum of money every month in a particular mutual fund. In case of VIPs, the monthly investment amount is unfixed, and that will vary according to the ups and downs of the market. The objective of a value investment plan is to invest more money when the market is down, thereby purchasing or assigning greater number of units, and on the other hand invest less money when the market is up and unit costs are higher, thereby buying lesser number of units. The main difference between a SIP and a VIP, therefore, is that the former invests a fixed sum every month whereas the latter allows you to vary your monthly investments.
How exactly does a value investment plan work?
Unlike a systematic investment plan, a value investment plan assumes a certain rate of return on your investments and accordingly lets you specify the target value of your portfolio. You set minimum and maximum investment amounts for any month. When the market is up, the minimum (or next to minimum) amount is invested and vice versa. Since Indian investors are more familiar with bank deposits rather than mutual funds investments, let us cite an example of two bank recurring deposits. The first one is a normal recurring deposit which sweeps a predetermined amount of money every month from your savings account. This is the regular RD we all know about. The second one is a flexible recurring deposit where you put a base amount in the first month, and in the coming months you can put anything between the base amount and a multiplier of the base amount (for example, Cent Swa Shakti Flexi Fix deposit scheme offered by the Central Bank of India; there are many other such recurring deposits as well but this is one I have parked my money in).
Is value investment plan a better option than systematic investment plan?
It depends. A value investment plan tends to do better in the down or bearish market. In fact the reason of launching VIPs by various fund houses in the last couple of years was the global recession followed by the Euro Zone crisis. In a bearish market, the cost of units are lower. Your portfolio takes time to reach the target value and therefore you can buy more. On the other hand, SIPs outperform VIPs in a rising or bullish market. This is because in a bullish market, units are costlier, leading your portfolio to reach the target value sooner. So the amount invested, or in other wors the number of units assigned, are lower in a bull market in case of a VIP.
To conclude, investing in a value investment plan may be a smart idea in a steadily declining market. However, if the market is overtly volatile or is moving upwards, SIPs are always better than VIPs. This is because in SIPs can adjust the volatility of a shaky market by rupee cost averaging, and in a bullish market it can make the most of the growth.
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