Giving your SIP investments the value edge — VIP

You have heard about SIP, or systematic investment plan, but VIP? Well, it’s not very important person, but value investment plan in mutual fund parlance.

The facility, introduced by Benchmark Mutual Fund two years ago, is similar to SIP but is more efficient and active.

So, what is a VIP?
Suppose you want Rs5,000 to be added to your equity mutual fund every month and you start with investing Rs5,000. Now, assuming you earned 10% rate of interest at the end of first month, the value of your fund is now Rs5,500. So, now you need to invest only Rs4,500 (10,000-5,500) in the second month to make the investment worth Rs10,000.

Assume that in the following month your investment value reduces to Rs8,000 due to some corrections in the market, so now you need to invest Rs7,000 (15,000-8,000) in the third month to meet the target amount of Rs15,000.

In short, you invest more when the prices fall and invest less when they rise. Like in the first month when the market rose, you bought units with Rs4,500 only while when the market corrected the following month you invested Rs7,000. Simply put, you buy more (units) when the prices are low and end up investing less (buying less units) when the markets peak.
VIPs are only a variation of SIP. Calculations show that a VIP generates better returns than an SIP in a fluctuating market. It invests more rupee amount when markets are low and less when markets are higher.

“We pioneered VIP and today we see a tremendous growth in the number of people wanting to apply for this facility. The response has been very positive and overwhelming,” says Sanjiv Shah, executive director of Benchmark MF.

“My clients prefer VIP over SIP as it helps them accumulate more units at every market dip. A VIP can earn them approximately 2% higher than what they would get in an SIP,” says Sayed Fatima, MF analyst- distribution at Bonanza Portfolio.

Under VIP, you need to contribute a sum every month to your MF scheme just like in an SIP. The only difference is that in an SIP one has to make a fixed monthly contribution while in a VIP the  contribution keeps changing depending on the market movements.

If you want to opt for VIP, all you need to do is tick on the VIP facility while filling up the form for investing in a fund. You also need to mention minimum and maximum limits that can be deducted from your account every month that will be invested in the respective fund.

“It is a very retail and apt product for people who don’t have the time to time the market. Depending on the market movement, the amount that goes towards the monthly contribution can vary unlike in an SIP giving a boost to the returns as well,” says Richa Karpe, director-investments, Altamount Capital Management.

Although VIP follows the same concept of rupee averaging like in SIP, it still hasn’t gained enough popularity unlike the SIPs. The key disadvantage is the sum one needs to invest each month is highly unpredictable.

“The MF distributors haven’t done enough to create awareness of VIP. Also, it remains less popular than SIPs because a salaried employee, whose income is constant, may find it difficult to commit to a VIP, knowing that the monthly contribution could vary widely,” says Suresh Sadagopan, who runs Ladder 7 Financial Advisory Services.