Friday, 10 September 2010

VIP or Value Averaging Investment Plan

You must have heard of SIP (Systematic Investment Plan) and SIS (Systematic Investment in Shares). There is another investment pan called VIP (Value Averaging Investment Plan) slightly different from SIP. It is a new and effective method of investment which is pledged to give you a desired return. In SIP the monthly deposit is same amount but in VIP the monthly deposit is varying according to the market performance of your investment portfolio. So it ensures you a desired amount of return, whatever may be the market performance of your investment.

Before starting VIP we have to decide Monthly base contribution, Maximum and Minimum amount to be contributed, Time period of your investment and the Expected rate of return.

Suppose you wish to get 24% expected annual return (the monthly expected return is 2%) and is ready to invest $ 5000 as a minimum contribution and the maximum contribution is $ 10000

If you  got 3% Monthly return at the end of the first month, which is $ 150 and your expected return was only 2% which is $ 100. So your total investment become $5150 other than your expected value was only $ 5100. So you got $ 50 more than you expected and the next month you should invest only $ 4950 ($ 5000 - $50)

But if at the end of the first month you got only 1% Monthly return which is $ 50 and your expected return was 2% which was $ 100. So your total investment becomes $5050 only other than your expected value of $ 5100. So you got $ 50 less than you expected and the next month you should invest $ 5050 ($ 5000 + $50)

If at all last month return is exactly same as expected then there will be no change in your next month’s contribution.

Considering that markets give average return of 24% over a period of 5 years, this type of investment strategy would give higher returns than traditional Systematic Investment plan (SIP). Returns could be higher to the tune of 3% or higher depending on the risk variable you choose.

It is more useful when you want a certain amount of money after a certain period. So this new system is good and acceptable.

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