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The idea is to spread out one's investment in the equity market, so that the volatility risk is
minimized. This ensures better chances of lower average cost of acquisition, when
compared to making a one-time lump sum investment... and hence the term rupee-cost
averaging.
Suppose we have Rs.12,000 to invest. We, therefore, invest Rs.1000 every month instead
of investing entire Rs.12,000 at one go.
Assuming that the markets are volatile and the NAV is fluctuating, systematic investment
results in acquiring more no. of units for the same total amount invested vis-à-vis one time
lump-sum investment. In other words it reduces the average cost/unit purchased.
There is, however, another strategy which also involves making small and regular
investments... but with a difference.
In this, the monthly amounts invested are 'not fixed'. In other words, your investment
amount varies month after month. Proposed by Michael Edleson of Harvard Business
School, it is called Value Investment Plan (VIP) and goes a step further than the SIP.
Suppose, I need Rs.12,000 after one year. And I want to reach this amount systematically
i.e. total value of my investment in the 2nd month should be Rs.2000, Rs.6000 in the 6th
month, Rs.10,000 in the 10th month and so on till I have Rs.12,000 in the 12th month.
Accordingly, every month I work out the value of units acquired till the previous month. Then
I invest such amount, which will make the total amount equal to the desired total value for
that month. Therefore, while the investment is regular, the amounts are not necessarily the
same.
Our investment is guided by the value the market offers – more value when the NAV is
down and less value when the NAV is up. Hence it is also known as Value Averaging.
Normally, the average cost per unit under VIP would still be lower than under SIP. Hence
the returns would be that much better.
Accordingly, the average cost per unit under value averaging is still lower at Rs.21.66 vis-à-
vis Rs.22.99 under SIP.
Thus, Value Investment Planning has the potential to deliver the best returns among the
aforesaid three investment strategies.
However, value averaging has one drawback. We have to monitor and adjust our
investment every month (vis-a-vis the passive SIPs, wherein we have to give our
instructions just once and thereafter the investment happens automatically.)