"VIP" Vs "SIP"

We started by advocating that SIP is an excellent investment option over One shot investment plan. Any Investor who opted for an SIP from January 2008, when index was at 21000, would have definitely been profited. Now, it is time to learn again. VIP appears to be much better than an SIP.

To start with, SIP stands for Systematic Investment Plan, where as VIP Stands for Value averaging Invesment Plan.

SIP is an organized way of investing constant amount in a Recurring manner for a definite duration. Indian Investors (atleast MF investors) are familiar with this concept. SIP is widely accepted as a disciplined investment option, irrespective of the market conditions, resulting in Rupee Cost Averaging.

VIP is method of investment developed by former Havard University professor Mr.Michael E. Edleson. It is similar to SIP except for the fact the amount invested every month varies depending on the current market value of the investment. As a result, when the market declines, the investor contributes more and when the market goes up, the investor contributes less. As a result, VIP takes care of capturing market volatility in a much more sensible way.

This is in contrast to SIPs based on Rupee Cost averaging which mandates that a fixed amount of money be invested at each period.

How does it work:
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(1) For instance, you intend to invest Rs.10000 every month for the next 12 months.
(2) A total investment of Rs.120000 is planned for an year (Rs.10000*12 months)
(3) If the NAV in the first month is Rs.10, you would have got 1000 units ( Rs.10000 / 10)
(4) In the next month, if the NAV rises to Rs.11, the current value of 1st months units ( 1000 U) would have been Rs.11000.
(5) Hence for the second month, the investment to be made is Rs.9000 only, to make up the total investment for the second month to Rs.20,000 (Rs.11000+Rs.9000).
(6) As a result only 409 units are allotted. Thus at Higher NAV you invested less (Rs.9000 instead of Rs.10000)
(7) Similarly, in the 3rd month if the NAV falls to Rs.9, then the value of the current investments (1st two months : 1000 U+818 U = 1818 U * Rs.9 = Rs. 16362).
(8) Hence you would invest Rs.13638 (Rs.30000-Rs.16362) for the 3rd month at Rs.9 getting 1515 Units.

Advantages of VIP
We checked VIP’s performance on various funds against SIP’s performance over a period of 22 months : From January 2008 to October 2009. (See Attachment) The finding are:
1. Higher returns: No doubt, VIP generates higher time weighted and money weighted returns compared to SIP in a volatile market. because the investor invests less when markets are high and more when markets are low.
2. Lower acquisition cost: In most cases, VIP offers lower acquisition cost compared to SIP.
Disadvantages of VIP:
• The biggest draw back of VIP is : Monthly investment amounts are variable. Many investors would find it difficult to maintain accounts and keep track of what they are investing.
• Except Benchmark CNX 500 fund, no other fund has got automatic VIP facility.
• However, you can do a VIP through other MFs by working out the numbers manually. Though this may look tedious, we at EASY Investments have developed dedicated softwares to assist you in this process.
• If the market moves in one direction i.e. either up or down, VIP may generate less return compared to SIP.
If the NAV of the scheme continuously decreases, the absolute loss to the investor would be more than what the investor would have incurred by investing in SIP.
• In a VIP, you may need to invest more when markets drop. So, you need to have the necessary funds during slumps.
• When market falls, you need better understanding on the concept of investing more (as per VIP). There has been frequent occurrence of investors stopping even SIP’s (constant amount) during a falling market. When a simple SIP concept can be so difficult to follow, to practice VIP, you need sound knowledge of the underlying strategy and remain committed, once the investment starts. Otherwise, it could backfire.