PERSONAL FINANCE MUSING 24 VALUE AVERAGING INVESTMENT PLAN (VIP) A FUNDAMENTALLY SUPERIOR INVESTMENT STRATEGY TO SIP

PERSONAL FINANCE MUSING 24

VALUE AVERAGING INVESTMENT PLAN (VIP)

A FUNDAMENTALLY SUPERIOR INVESTMENT STRATEGY TO SIP

My book, “Musings of a (financially) illiterate father- a common investor’s guide to wealth creation and retention is scaling new heights every day besides generating a buzz and having great sales. The book is now available in e-format too on Kindle, Kobo, i-books, and Google.

I will urge you to continue to share this post too as my book has been specially written to teach the alchemy of wealth creation and retention to our children-they deserve to learn it. Please support this mission of financial literacy by reading and recommending this book. The link is given below.

https://www.amazon.in/Musings-Financially-Illiterate-Father-Investors/dp/1643247263?tag=googinhydr18418-21&tag=googinkenshoo-21&ascsubtag=2cd97bc1-4bb5-4954-8f55-6fbb7070d8b9

Qamar Waheed Naqvi is among the new age icons of Hindi journalism. He is one of the members of the founding team of Aaj Tak, who later became its Editorial Head and the Chief Executive Producer. He returned as the News Director of the channel in 2004 helping the group to expand with the fast news channel Tez and Delhi Aaj Tak. The group’s flagship English News Brand Headlines Today was consolidated under his supervision. He retired from Aaj Tak in 2012 and joined India TV as its Editorial Director in October 2013.

Naturally, his yardstick to judge any written work is very high- a veritable gold-standard for authors. He was gracious enough to read the excerpts of the book and had this to say:-

“You can mint crores while you earn only in thousands! Yes, you read it right. This illuminating book by Anand Saxena tells you how to play with your Money and score BIG. Managing Personal Finance is generally considered a cumbersome and complex subject and because of this majority of Indians have no or little awareness of it, resulting in self-inflicted deprivation in life and particularly suffering in their sunset years. In an easy and lucid language, the author guides us through his musings that how easily one can create his Wealth Empire with a little bit of discipline and meager investments. A must read for newbies entering into the job market and laymen who have not yet started giving a serious thought to this money-minting game.”

          I wish to convey a big thank you to Naqvi Ji for these wonderful words- indeed humbling for a debut author.

This week we continue our discussion on investment strategies for a common investor who is generally able to invest on a monthly basis and yet seeks to maximize returns while minimizing volatility. We had learned about the first strategy i.e. Systematic Investment Plan (SIP) last week including the explanation as to why it is a winner in all market conditions. I am providing the link below for continuity.

          https://andysfinancial.blogspot.com/2018/08/personal-finance-musing-23-systematic.html

          Today we shall see another investment strategy which is fundamentally capable of generating much superior returns than SIP- it’s called Value Averaging Investment Strategy or VIP. This strategy is also about regular monthly investments akin to SIP but the amounts are not uniform and vary as per the market conditions. So, you would invest more in down market conditions and vice-versa. You would notice that this is the broad concept even in SIP wherein down market conditions your investment ends up buying more units of the mutual fund but it is limited by your investment amount for the month. In VIP, this constraint of an upper limit to buy is significantly higher so you buy even more units/shares viz-a-viz SIP when the market is down. Let’s understand with an example.

          In SIP, an investor who wishes to invest Rs 10,000 every quarter (for ease of understanding only, the strategy works as well in a monthly plan also) invests in a mutual fund whose NAV is Rs 100 at the beginning of the first quarter. He will end up buying 100 units. Next quarter, if the NAV has gone up to Rs 125, he buys only 80 units because his amount is fixed at Rs 10,000 (SIP amount). The next quarter, the NAV drops to Rs 80 so he gets to buy 125 units. Notice that despite a significantly down market his upper limit to buy units is constrained by his fixed SIP amount i.e. Rs 10,000. In the fourth quarter the NAV comes back to starting NAV i.e. Rs 100, so he buys 100 units again. Overall, in these four quarters of investing he has invested Rs 40,000 and accumulated 405 units (100+80+125+100).

          Let’s now switch to another investor who decides to go by VIP strategy. Here he maintains a cash reserve in a liquid fund to take advantage of down market conditions. For the case in point, a reserve of around Rs 10,000 should suffice. Here, the investor doesn’t fix the Rupee amount to be invested each quarter but instead fixes the growth rate for his investment, and accordingly increases/decreases the units being purchased. For discussion here, let’s say, he fixes the investment to increase by Rs 10,000 each quarter- so in the second, third and fourth quarter, the investment should be increased to Rs 20,000, 30,000 and 40,000 respectively.

Continuing with our example, in the first quarter he still buys 100 units as the first investor. In the second quarter, the investment should be increased to Rs 20,000 and the NAV is Rs 125 so he should have 160 units (Rs 20000/ Rs 125). He already holds 100 units from his investment in the first quarter and hence needs to buy only 60 units now. Thus he invests only Rs 7,500 this quarter (Rs 125*60). Notice how in an overheated market his investment amount has automatically reduced.

In the third quarter, his investment should be increased to Rs 30,000. The NAV is Rs 80 and hence he should have 375 units (Rs 30,000/Rs 80). He already holds 160 units so he needs to buy another 215 units which he buys for Rs 17,200 (Rs 80*215). A similar strategy is followed in the fourth quarter. Let’s now see in a tabulated form[1] what the financial state of these two investors is after these four quarters.

		SIP			VIP
Quarter	NAV	SIP Amount	Units Purchased	Total Units	Investment Target	Units Purchased	Total Units	Actual Investment
1	100	10000	100	100	10000	100	100	10000
2	125	10000	80	180	20000	60	160	7500
3	80	10000	125	305	30000	215	375	17200
4	100	10000	100	405	40000	25	400	2500

The beauty of VIP will still not be quite clear to you even at this stage so let me introduce you to another table to showcase the additional returns that the second investor has managed.

	Average Cost	Total Cost	Current Value	Current Gain
SIP	98.76	40000	40500	500
VIP	93.00	37200	40000	2800

In these four quarters itself, the Value investment strategy has outperformed the SIP by a huge margin. Mind you, the magic of SIP still remains as it has proven to be a profit-making strategy over one year but the margin of profit is much lower as compared to VIP. I will request you to mull over the two strategies for this week. Next week I will get down to the pros and cons of VIP and the practical ways to implement it in the portfolio of a common investor.

          My book (paperback) is currently available domestically on Amazon.in, Flipkart, Infibeam and Notion press, and internationally on Amazon.com and Amazon.co.uk. The e-Book version is available on Kindle, Kobo, i-books and Google Books.

          For now, enjoy your Sunday while reading my book- you have earned it.

---

[1] https://www.investopedia.com/articles/stocks/07/dcavsva.asp. Accessed on 25 Aug 2018.