We at NriCapital.com thrive in providing innovative products that assist clients in making investments and increase the returns on their investments. Systematic investment plans is something that all investors know. We have gone ahead and introduced Value averaging investment plans.
What is VIP (Value averaging investment plan)?
As the name suggests, value averaging investment is based on averaging technique and aims at attaining a desired portfolio value by investing more amount when the markets are declining and invest less amount when the markets are rallying.
The concept assumes that an investor will be willing to invest more money in case the markets perform negatively so that the value of the portfolio is maintained at the desired value which the investor planned for. Similarly if the markets rally and the value of the portfolio increases, to what the investor planned for then the additional investment in the next month will be reduced proportionally.
Opposite to SIP where a fixed amount is invested irrespective of the market conditions the investment amount in VIP is calculated as
Investment Amount = Target Portfolio Value – Actual Portfolio Value
Target Portfolio Value is calculated based on the long term average return expected by the investor.
How the VIP works
Under the value averaging investment plan the investor needs to decide the minimum/maximum amount that can be invested every month and the desired rate of interest the wants on his investment. So let’s assume that the investor plans to invest in Reliance Equity Opportunities fund and wants 15% return. If the amount invested is INR 10000 the value of the investment after one month should be 10125. Depending on the market movements, the value of the investment will increase or decrease.
Assuming the markets rallied and the value of the investment increased to 10250 which is 125 more than the desired target value the next month investment will be 9875. Similarly, if the markets declined and the value of the portfolio was 9900 the next month investment would have to be increased to 10225.
Things to keep in mind while choosing Value Averaging Investment plans
There should always be a cap defined for investment. You do not want to get stuck in a situation where the markets fall for a longer term and the amount to be invested reaches out of the investment capacity of the investor.
Similarly, the minimum amount to be invested should always be chosen as Zero. You do not want a situation where investment is sold/redeemed as the markets rally and the amount to be invested is zero.
The biggest problem with this type of investment is choosing the rate of returns that an investor wants. “IS GREED GOOD OR BAD”
While opting for VIP an investor needs to choose the ROI very carefully. They should neither set under valued returns nor should they expect extremely high returns which can make the investment to attain the same out of their investment capacity.