First a few words about what VIP or VCA is. The full form is Value Investment Planning or Value Cost Averaging. SIP stands for systemic investment planning.
In SIP, you invest a fixed or variable amount every month in a particular mutual fund. Due to the cost averaging, you lower your ACQUISITION COST only.
Thus in the bear phase between 2000 and 2003, NAV of Franklin Prima fund dropped from 38.50 rs per unit to 29.56 rs per unit. So if you had invested lump sum 1 lac rs in 2000 in the fund, you would have lost 23 percent till 2003, the fund value would have come down to 77 thousand rs only.
However if you had invested through SIP from 2000 to 2003, the acquisition cost would have gradually come lower by investing a fixed sum every month rather than one lump sum investment and in 2003, you would be sitting on a profit of 32 percent on the investment.
In VCA or VIP, you do not sit idle after giving instructions to the bank to invest through SIP. Here whenever the N.A.V. value goes up , you sell the profit side of the units . You may determine beforehand that if I get 5 percent or 10 percent profit, I will sell. You sell only the profit amount and not the whole amount.
How VCA differs from SIP is that here you sell to book profits while in SIP you only buy and do not sell. Hence the cost and returns of the mutual fund units goes down further. Thus in bear phase between 2000 and 2003, while in SIP you made profit of 32 percent, in VCA you made profit of 48 percent.
In bull phases the profit booked through VCA can go up to infinity as you can turn your acquisition cost to negative by systemic purchase and profit booking.Take the bull run from 1995 to 2000. The N.A.V. of franklin prima went up from 18.01 rs in mar 1995 to 38.49 rs in 2000.
A lump sum investment in mar 1995 gave a return of 113 percent in mar 2000. Through SIP, the return on 1000 rs per month was 201 percent as 61 thousand invested became 1, 83, 455 rs. In VCA , through selling periodically the cost of acquiring units became negative so returns became infinity.
CONFUSED? no problem . I will deal with some mutual funds of my portfolio to show how I maximised my returns through VCA. I will also add tips on how to make the most of the coming months by following this strategy.
In my next series, I will deal with the highly popular SBI Magnum Contra fund. You will get it within the next 24 hours.
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