Yogita Loke explains how your investors can take advantage of VIP
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What is Value averaging Investment Plan (VIP)?
Like SIPs, Value averaging Investment Plan (VIP) requires monthly contributions. However, while SIP requires your investor to invest a fixed amount, VIP works on the concept of value averaging. The investor sets a target level for his/her portfolio that they desire over a certain period of time. With each passing month, the plan adjusts the next month’s contribution as per the relative gain or fall on the original portfolio value from the target portfolio value.
How does it work?
In a Value Averaging Investment Plan, the amount invested each month is not fixed, but varies with market fluctuations.
Example: Your investor wants to invest Rs 1000 a month for certain period of time. Now at the end of first month, let us say the value of your investor’s fund becomes Rs 1200. So now he needs to invest Rs 800 (1000-200) only, to make the investment worth Rs 2000. Likewise, in the following month, if the value of investment reduces to Rs 1900, due to a downturn in the market, he needs to invest Rs 1100 (3000 - 1900) to make the amount reach the target amount of Rs 3000.
What are the advantages of VIP?
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VIP allows your investors to take advantage of bearish phases in the market.
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Your investor enjoys the benefit of power of compounding.
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Removes emotions from the decision making process.
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Your investor gets advantage of the market movements without hassles.
Who offers VIP?
Benchmark AMC offers VIP through S&P CNX 500 fund. HDFC Mutual Fund and Reliance Mutual Fund also offers similar plans but under different names. While Reliance calls it Smart Step, HDFC has it under the name of Flex STp.