the benefit of value cost averaging over ruppee cost averaing
DESCRIPTION
Benefits of Value cost averaging over rupee cost averaging, market movement and volatility can be eased with VCA and SIP.TRANSCRIPT
Dilshad Billimoria Certified Financial Planner
© Dilzer Consultants
The benefit of Value Cost Averaging (VCA) over Rupee Cost Averaging(SIP).
The basic tenant of investing is buying low and selling high. However, this principal, is
often never put to use, because fear, greed are stronger than long term investing
discipline.
What is even sadder is the public, normally buys at highs and sells at lows, which grossly
undermines returns and the investor, ends up loosing money and not being happy with the
investment decision or the financial planner.
The basic tenant of investing systematically through a disciplined and long term savings
approach would create wealth in abundance for the investor.
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 principal is, in falling markets, one buys more units and in rising
markets, one buys fewer units or may even require 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. This is also called Rupee Cost Averaging.
Therefore, the distinctive feature of VCA over SIP or rupee cost averaging is as a rule,
VCA may also result in selling some units, to maintain the desired portfolio target, which
SIP does not do.
Dilshad Billimoria Certified Financial Planner
© Dilzer Consultants
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
Dilshad Billimoria Certified Financial Planner
© Dilzer Consultants
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
Therefore Value Cost Averaging helps in achieving:
1. Lower Average Cost per unit when compared to SIP.
2. Reduces Portfolio Volatility.
3. Helps achieve goal based target value.
Dilshad Billimoria Certified Financial Planner
© Dilzer Consultants
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)
Can be reached at [email protected]