The sharp correction witnessed by markets on August 24 saw many investors rushing to invest in equity funds to the make the most of the fall. They exhibited the correct behavior – buy low and sell high.
Since it is not possible to time investments according to market movements, many investors prefer to invest through SIP. But investing through SIP means your clients will invest a fixed amount even when the markets correct sharply, when they should be investing slightly more than the regular SIP amount. This is where the concept of value averaging helps.
Like SIPs, Value Averaging Investment Plan (VIP) requires monthly contributions but the amount of contribution changes according to the market value. The investor sets a target value of portfolio that they desire to accumulate over a certain period of time. With each passing month, the plan adjusts the subsequent contributions as per the relative gain or fall on the original portfolio value from the target portfolio value.
VIP works something like this. For instance, your client wants to invest Rs 1,000 a month for a certain period of time. Now at the end of first month, let us say the value of fund becomes Rs 1,200. So now your client needs to invest Rs 800 (1000-200) only, to make the investment worth Rs 2,000. Likewise, in the following month, if the value of investment reduces to Rs 1,900 (due to a fall in the market) he needs to invest Rs 1,100 (3000 - 1900) to make the amount reach the target amount of Rs 3,000.
“VIP works for people who have the capacity to invest more but are investing less. While the concept of VIP is good it has its flaws. One flipside of VIP is that if excess amount is debited from clients account for few months they may have cash flow problems,” says Nikhil Kothari of Etica Wealth Management.
Another flipside of VIP is that your client may miss out investing in a bull run. (Since the strategy will require your client to invest less or redeem if the target value is reached or surpassed) Nevertheless, this strategy is generally adopted by financial planners when clients wish to achieve a target value irrespective of the market movements.
Financial planners say that investing less when markets peak is a good way to mitigate risk. “You are investing less when markets rise which helps you cut down risk. The chances of market correcting are more when markets continuously rise. VIP is a risk mitigation measure,” says Suresh Sadagopan of Ladder 7 Financial Advisory.
Suresh says that value averaging works better if it is done on an everyday basis. “Value averaging may not be of so much help if it is done monthly. You may invest more in a particular month and the market can correct sharply in a day or two. Thus, daily averaging is a much better option.”
Investors also have other options offered by fund houses which makes investing during market dips easier. Many fund houses have come up with auto trigger options which enables investors to invest in equity funds depending on the movements of Sensex or Nifty.
For instance, HDFC calls it HDFC Flexindex Plan which allows investors to switch a specified amount registered from one scheme to another scheme if the Sensex or Nifty index reach a certain level. Similarly, Edelweiss Mutual Fund offers Prepaid SIP which allows investors to invest a pre-determined lump sum amount when the market falls by 0.5%, 1% or 2%.
Reliance MF offers STeP plan which allows investors to invest a lump sum or through SIP in a liquid or debt scheme and switch a fixed amount in any Reliance MF equity funds. However, advisors need to choose a scheme carefully as the source scheme can charge an exit load.
If your clients do not wish to enroll for auto trigger options, another option is to start two SIPs – one in equity fund and another in liquid fund. If the market corrects sharply, your client can switch from liquid to equity fund. However, you would need some technology to help you switch from one scheme to another in order to get same day’s NAV. “We use an online tool to do such switches. We did over 70 switches on August 24 when the markets dipped by 6%,” says Nikhil.
Even if you are not using a high end technology platform, your clients can make investments through the websites of fund houses if they have generated iPIN and internet banking.
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