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Dilshad Billimoria of Dilzer
Consultants illustrates the benefits of Value Cost Averaging over Rupee Cost Averaging
(SIP).
 A
basic tenet of investing is buying low and selling high. Another basic tenet of
investing is investing systematically through a disciplined and long term
approach to create wealth. However, both the tenets are often ignored because
fear and greed are stronger than long-term investing discipline.
What
is even sadder is that the public normally buys at highs and sells at lows,
which grossly undermines returns and investors ends up losing money and not
being happy with the investment decision or the financial planner.
Value
Cost Averaging (VCA), is an investment technique similar to systematic investing
(SIP), where investments are made systematically over a period of time, but the
quantum of investment in VCA changes depending on market fluctuation.
This
ensures your portfolio value rises by a specified amount at every installment
period, regardless of market conditions. Sounds interesting..? Read on.
VCA
enables financial planners reach the desired goal amount in a more predictable
manner.
VCA
fixes a target amount each month, and ensures this target amount is maintained every month, irrespective of the
market price. Therefore, the investor buys or sells, only those units that are
required to maintain the predestined portfolio worth at each revaluation point,
which is typically every month.
Therefore,
the simple principle is, in falling markets, one buys more units and in rising
markets, one buys fewer units or one may even be required to sell some units to
maintain the target portfolio amount.
In Systematic
Investment Plan (SIP), a fixed amount is invested every month, irrespective of
the predetermined portfolio value where the fixed amount buys a number of units
based on the prevailing NAV. Underlying this approach is Rupee Cost Averaging
where more units are purchased when price is low and vice versa.
Therefore,
the distinctive feature of VCA over SIP is as a rule, VCA may also result in selling
some units, to maintain the desired portfolio target, which SIP does not do.
An
illustration is provided below on the workings of VCA and SIP
Variable Investment Plan (Value Cost
Averaging concept)
|
Month
|
NAV
|
Target Portfolio amount
|
Cumulative units
|
Units Purchased/ Sold
|
Amount Invested per month
|
|
1
|
10
|
1000
|
100.00
|
100
|
1000
|
|
2
|
12
|
2000
|
166.67
|
66.67
|
800
|
|
3
|
16
|
3000
|
187.50
|
20.83
|
333
|
|
4
|
12
|
4000
|
333.33
|
145.83
|
1750
|
|
5
|
17
|
5000
|
294.11
|
-39.22
|
-666.74
|
|
6
|
15
|
6000
|
400.00
|
106
|
1590
|
|
Total Amount Invested
|
13.66
|
6000
|
400.00
|
400.00
|
4807
|
|
Average cost per unit
|
12.01
|
Systematic Investment Plan (Rupee Cost Averaging
concept, using the same figures)
|
Month
|
NAV
|
Target Portfolio amount
|
Cumulative units
|
Units Purchased
|
Amount Invested per month
|
|
1
|
10
|
1000
|
100.00
|
100
|
1000
|
|
2
|
12
|
1000
|
183.33
|
83.33
|
1000
|
|
3
|
16
|
1000
|
245.83
|
62.50
|
1000
|
|
4
|
12
|
1000
|
329.16
|
83.33
|
1000
|
|
5
|
17
|
1000
|
387.98
|
58.82
|
1000
|
|
6
|
15
|
1000
|
454.65
|
66.67
|
1000
|
|
Total Amount Invested
|
13.66
|
6000
|
454.65
|
454.65
|
6000
|
|
|
|
|
|
|
|
|
Average cost per unit
|
13.19
|
Illustration of Variable Investment Plan
or Value Cost Averaging in a rising market
|
Month
|
NAV
|
Target Portfolio amount
|
Cumulative units
|
Units Purchased/ Sold
|
Amount Invested per month
|
|
1
|
10
|
1000
|
100.00
|
100
|
1000
|
|
2
|
14
|
2000
|
142.85
|
42.85
|
600
|
|
3
|
16
|
3000
|
187.50
|
44.65
|
714
|
|
4
|
18
|
4000
|
222.22
|
34.72
|
625
|
|
5
|
26
|
5000
|
192.30
|
-29.92
|
-778
|
|
6
|
26
|
6000
|
230.76
|
38.46
|
1000
|
|
Total Amount Invested
|
18.33
|
6000
|
240.00
|
640.00
|
3161
|
|
Average cost per unit
|
13.17
|
Illustration of Variable Investment Plan
or Value Cost Averaging in a falling market
|
Month
|
NAV
|
Target Portfolio amount
|
Cumulative units
|
Units Purchased/ Sold
|
Amount Invested per month
|
|
1
|
40
|
1000
|
25.00
|
25.00
|
1000
|
|
2
|
34
|
2000
|
58.82
|
33.82
|
1150
|
|
3
|
32
|
3000
|
93.75
|
34.93
|
1117
|
|
4
|
32
|
4000
|
125.00
|
31.25
|
1000
|
|
5
|
16
|
5000
|
312.50
|
187.50
|
3000
|
|
6
|
10
|
6000
|
600.00
|
287.50
|
2875
|
|
Total Amount Invested
|
27.33
|
6000
|
600.00
|
600.00
|
10142
|
|
Average cost per unit
|
16.90
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Therefore,
Value Cost Averaging helps in achieving:
- Lower average cost per unit when
compared to SIP.
- Reduces portfolio volatility.
- Helps achieve goal based target value.
While,
this is an excellent option, most funds barring a few, do not have this unique
technique to offer investors.
Contributed
by Dilshad Billimoria Certified Financial Planner and Investment Advisor who
can
be reached at dilzerconsultants@gmail.com
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