SIP or VIP What is Your Choice?
VIP and SIP have their own advantages and disadvantages, but VIP scores over SIP when it comes to returns. However, VIP requires better liquidity and constant monitoring of fund’s NAV to derive the advantage
One of the cardinal principles of investing is “Buy Low and Sell High”. This helps investor to generate better returns. This is equally applicable for mutual fund investor who is always looking out for an opportunity to earn more. Nevertheless, one of the greatest impediments to following such a principle is volatility in the market. You never know when the market is at low and when is it at high. The movements in the prices of stocks held by mutual fund schemes are highly unpredictable, at least over the shorter duration, due to which the NAVs (Net Asset Values) of the schemes also fluctuate. So, in order to protect and grow their investments faster, investors have various options available for investments in mutual funds. In other words, investors look out for the best possible option to protect their investments which will help them invest at the right time and in the right way to earn best returns.
VIP vs SIP
One of the not-so-popular ways of investing is value averaging investment plan (VIP). The concept follows the conventional investment philosophy of buying at lows and selling at highs, or buying lesser at higher prices. In this method, the investor determines his goal, which is the final amount that he wants to reach at the end of the given period and invests accordingly with the market movement. VIP is more a formula-driven approach that forces you to buy higher at lower prices, while you may not buy at higher price at all.
VIP is very much different from SIP (Systematic Investment Plan), one of the most popular, highly publicised and widely used investment tool by mutual fund investors. This investment method is also known as rupee cost averaging method. Here, the investor invests a predefined amount every month, irrespective of market movement. Therefore, if the market is going down, he may be buying more units, but he may not be deploying higher amount.
Both these concepts score well in various market conditions and protect the investors from the risk associated with market volatility. Let’s take an example. Suppose, if an investor wants to invest Rs 24,000 every year, he will invest it in a year by opting for an SIP of Rs 2000 per month. Accordingly, if the NAV of the scheme goes down, the investor will receive more units, and if the NAV goes up, then he will receive lesser number of units. Since the investor is buying every month, he will be buying at dips as well as rallies, so he is ultimately averaging his cost over the period.
However, the concept of VIP works backward as the value of investment changes for every month. Here, an investor decides the final amount of investment which he wants to accumulate and, accordingly, sets his goals for every month. So, when the NAV goes up, the investor needs to invest less and at lower levels he must invest more.
Let us take another example. Suppose an investor needs Rs 24,000 after one year and he needs to reach this amount systematically i.e. he will plot his investment over the period. So, the target for the total value of his investment in the second month would be Rs 4,000, Rs 10,000 in the 5th month, Rs 20,000 in the 10th month and so on, until he reaches Rs24,000 in the 12th month. With this plan, every month he will work on the value of units acquired in the last month and then he will invest an amount which will help him reach the desired value of investment for that month. So even if the investment is disciplined, the value or sum that he needs to invest keeps on changing according to the movement in scheme’s NAV. Depending on the goal and the amount of investment you are making, you need to keep liquid cash so that you can reap the benefit of a dip in the market.
Example
To make it more illustrative, we have looked at how VIP and SIP work in a different market conditions. Let’s assume the investment is done in one of the very popular mid-cap schemes in various market conditions.In the above example, we have analysed both the investments in SIP and VIP while investing in the same fund in the same market conditions.
In the bull market, an investor gets good returns in both the cases. In the case of SIP, the investor has invested Rs 2,000 every month. So, the total investment he made is of Rs 24,000 in a year. In the bull market, the SIP has reaped a return of 24%, which we have calculated using XIRR. That is, the investor has earned a profit of ~Rs 2996 by way of increase in the value of investment.
Similarly, while adopting VIP as an investment tool, in the same condition with a goal of reaching Rs 24,000 by the end of the year, the investor invested only ~Rs 20,357. This has helped the investor earned a profit of Rs 3,642and its XIRR comes at 25%. So, in a bull market, an investor can earn more by investing lesser amount through the VIP. Similarly, in a trending and down market where the market volatility is much higher, the losses remain more capped in the VIP than in the SIP.
Both SIP and VIP protect during market volatility, but if we observe the end result of these investment plans, VIP gives an edge with a higher annualised return of 1% in all the three types of market. With the power of compounding, this 1% is expected to give much higher returns in the longer run. So, in the case of return yield, VIP scores over SIP. However, with VIP, the investor needs to watch the market continuously as he has to adjust the investment every month, which is a tedious job. It may create some issues of cash flows if he is having limited
financial resources. Though the VIP reaps more returns than the SIP, the SIP is still a good investment strategy for investors who do not want to invest a lump sum amount but want to invest regularly in mutual funds. However, investors who wish to reach the targeted amount and can monitor the market continuously and change the investment amount as per market movement, VIP is be a good option for them.