Benchmark Mutual Fund has approved an additional facility, Value Averaging Investment Plan (VIP) in Benchmark S & P CNX 500 Fund with effect from 20 May 2009.
Features of VIP:
Value Averaging Investment Plan (VIP) is based on value averaging which is a technique of adding to an investment portfolio and to endeavour to provide better return than similar methods such as Systematic Investment Plan (SIP). It was developed by former Harvard University professor Michael E. Edleson. Value averaging is a formula based investment technique where a mathematical formula is used to guide the investment of money into the portfolio over a time.
With the method, investors contribute to their portfolios in such a way that the portfolio balance increases by an amount calculated by a formula based technique, regardless of market fluctuations. As a result, when the market declines, the investor contributes more and when the market goes up, the investor contributes less. This is in contrast to SIPs based on Rupee Cost averaging which mandates that a fixed amount of money be invested at each period.
Value Averaging Investment Plan (VIP) is based on value averaging which is a technique of adding to an investment portfolio and to endeavour to provide better return than similar methods such as Systematic Investment Plan (SIP). It was developed by former Harvard University professor Michael E. Edleson. Value averaging is a formula based investment technique where a mathematical formula is used to guide the investment of money into the portfolio over a time.
With the method, investors contribute to their portfolios in such a way that the portfolio balance increases by an amount calculated by a formula based technique, regardless of market fluctuations. As a result, when the market declines, the investor contributes more and when the market goes up, the investor contributes less. This is in contrast to SIPs based on Rupee Cost averaging which mandates that a fixed amount of money be invested at each period.
Advantages of VIP:
The three main advantages of VIP are as follows:
1. Higher returns: In most cases, VIP generates higher time weighted and money weighted returns compared to SIP 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.
3. Meeting financial goals: VIP endeavors to maintain the portfolio value to the planned target amount reduces the risk of not meeting financial goals. It is done by adjusting the investment amount (within a specified range) to react to the return offered by the scheme.
The three main advantages of VIP are as follows:
1. Higher returns: In most cases, VIP generates higher time weighted and money weighted returns compared to SIP 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.
3. Meeting financial goals: VIP endeavors to maintain the portfolio value to the planned target amount reduces the risk of not meeting financial goals. It is done by adjusting the investment amount (within a specified range) to react to the return offered by the scheme.
Disadvantages of VIP: Monthly investment amounts are variable in VIP.
Plan Details
A. Investors in VIP will have to mention two amounts explained as under:
Plan Details
A. Investors in VIP will have to mention two amounts explained as under:
1. Nominal amount: This is the amount which the investor will invest at the time of enrolment for VIP. The nominal amount would be used to calculate target portfolio amount and in the circumstances when market rises in straight line giving the target return, this amount would be the actual amount to be invested.
The minimum nominal amount shall be Rs 2000 and in multiples of Re 1 thereafter and there is no maximum cap on this amount.
2. Maximum monthly debit amount:
This amount is the maximum amount which the investor would allow the fund to debit from their account. There is no upper limit for this amount shall be higher than the nominal amount.
The minimum nominal amount shall be Rs 2000 and in multiples of Re 1 thereafter and there is no maximum cap on this amount.
2. Maximum monthly debit amount:
This amount is the maximum amount which the investor would allow the fund to debit from their account. There is no upper limit for this amount shall be higher than the nominal amount.
B. The rate of return to be considered for VIP is 15% per annum, based on which installments of investments to be invested by the investor would be calculated.
Amount for investment in VIP:
Every month based on the portfolio value, the Fund will derive an amount be invested (subject to maximum monthly debit amount specified by the investor) for the next moth and that amount will be debited from the investor's account. The minimum amount to be debited from the investor's account is nil. Hence, there could be times that when markets have appreciated; there is no debit in the investor's account.
Amount for investment in VIP:
Every month based on the portfolio value, the Fund will derive an amount be invested (subject to maximum monthly debit amount specified by the investor) for the next moth and that amount will be debited from the investor's account. The minimum amount to be debited from the investor's account is nil. Hence, there could be times that when markets have appreciated; there is no debit in the investor's account.
Risk factors pertaining to VIP:
• As the monthly investment amount is variable, it would be difficult for the investors to manage their cash flows.
• 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.
• As the monthly investment amount is variable, it would be difficult for the investors to manage their cash flows.
• 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.
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