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Are SIPs Passé?

Benchmark MF has unveiled a riskier, but potentially lucrative, alternative

The systematic investment plans (SIPs) have been recommended for the retail investor as the safest, quickest and least risky way to wealth. While SIPs are important, they can let certain opportunities slip out of the hands of investors. Looking to tap these money-making chances on an automatic basis is the promise of a fairly new concept in India.

(Calculate SIP returns)

Welcome to the world of the Value Investment Plan, or the otherwise not quite apt acronymic -- VIP.

Benchmark Mutual Funds has come up with the VIP concept for its S&P CNX 500 Fund.

Developed by former Harvard University professor Michael E. Edleson, Value averaging Investment Plan (VIP) is based on value averaging which is a formula-based investment technique where a mathematical formula is used to guide the investment of money into the portfolio over a time.

Under VIP, 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 systematic investment plans (SIPs) which are based on Rupee Cost Averaging, mandating a fixed investment at each period. The VIP technique takes into consideration the expected rate of return of your investment.

Plan Details
Investors opting for VIP will have to mention two amounts explained as under:

• Nominal amount: Minimum Rs. 2,000
This is the amount that the investor will invest at the time of enrollment for VIP. This amount is then used to calculate the target portfolio amount and in the circumstances when market rises in a straight line giving the target return, this amount would be the actual amount to be invested.

• Maximum Monthly Debit amount
This amount is the maximum which the investors would allow the fund to debit from their account. Since the amount of investment is variable depending upon the actual performance the market, specifying a maximum limit of investment helps the investors to manage his/her cash flows.

Amount of Investment in VIP
The amount of investment every month depends upon the actual performance of the markets. The minimum amount to be invested is Nil, and the maximum will depend upon the limits specified by the investors. Hence, there could be times that when markets have appreciated; there is no debit in the investor’s account.

Expected Rate of Return
The rate of return to be considered for VIP is 15 per cent per annum, based on this the monthly investments by the investor will be calculated.

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 for long periods of time i.e. stays down for a year, VIP may generate less returns 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.