Beyond SIP: What is Value Averaging and Is It a Smarter Way to Invest?

If you're investing in mutual funds, you've probably heard of the Systematic Investment Plan (SIP). It's the gold standard for disciplined investing: you invest a fixed amount, say Rs. 5,000, every month without fail. It’s simple, powerful, and effective.

But what if you could take your investing strategy to the next level? What if you could automatically invest more when the market is cheap and less when it's expensive?

That’s exactly what the Value Averaging Investment Plan (VAIP) is designed to do.

What's the Big Idea behind Value Averaging?

While a SIP focuses on investing a fixed amount of money regularly, Value Averaging focuses on making the total value of your investment grow by a fixed amount each month.

This subtle shift in focus leads to a powerful outcome:

• When the market dips, you invest more money to catch up to your target.
• When the market rises, you invest less money because you're already ahead.

In essence, it forces you to live by the ultimate investing rule: Buy low, sell high (or at least, buy less high).

Let’s see It in Action: Simple Example

Imagine you want your investment portfolio to grow by Rs. 10,000 every month.

Month 1:

• Your Goal: Have Rs. 10,000 in your account.
• Your Investment: You start by investing Rs. 10,000. Simple.

Month 2:

• Your Goal: Have a total of Rs. 20,000 in your account.
• Now, let's look at what the market did.

Scenario A: The Market Dips 📉

• Your initial Rs. 10,000 investment after a month it worth only Rs. 9,800.
• To reach your Rs. 20,000 target, you need to add Rs. 10,200 this month (since Rs. 9,800 + Rs. 10,200 = Rs. 20,000).
• The Result: You automatically invested more money when prices were low. That’s a smart move!

Scenario B: The Market Soars 📈

• Your initial Rs. 10,000 investment has grown to Rs. 10,300 next month.
• To reach your Rs. 20,000 target, you only need to add Rs. 9,700 this month (since Rs.10,300 + Rs.9,700 = Rs.20,000).
• The Result: You invested less when prices were high, preventing you from overpaying. Genius!

Read  SIP vs VAIP in detail

The Good, The Bad, and The Complicated

Value Averaging sounds amazing, and it can be. But it’s not for everyone. Let's be honest about the pros and cons.

The Advantages:

1. Potential for Higher Returns: By buying more units when they are cheap and fewer when they are expensive, your average cost per unit can be lower than with a regular SIP. This can boost your long-term returns.
2. Disciplined and Logical: It removes emotion and forces you to act rationally—buying more during scary market dips when others are panic-selling.
3. Goal-Oriented: The strategy is built around hitting a specific value target, which can be highly motivating.

The Challenges:

1. The Math can get difficult: Unlike a fixed SIP, you have to calculate how much to invest each month. This requires you to track your portfolio's value and do some math regularly. Instead consult an Investment Advisor to manage this to make better returns on your investment.
2. It’s not always "Set It and Forget It": Most mutual fund platforms in India are built for standard SIPs. This means you might have to manually adjust your investment amount each month, which requires time and discipline.
3. What if the Market Really Dips? In a strong bear market, the formula might tell you to invest very more, in the short run your ROI might be lower than an SIP. In the long run when the market Soars you will behind. So underlying assumption or expectation is market will go up.

The Easy way Out: Smart SIPs to the Rescue

Recognizing these challenges, some innovative Asset Management Companies (AMCs) have launched products that automate the Value Averaging process for you. These are often called:

• Smart SIPs
• Flexi SIPs
• Booster SIPs

These plans automatically adjust your monthly investment amount based on market valuations (like the P/E ratio). They give you the benefits of Value Averaging without the manual calculations and hassle.

Who should consider Value Averaging?

• The Disciplined Investor: Someone who is willing to be a bit more hands-on than a typical SIP investor.
• The Long-Term Planner: This strategy shines over several years, as it capitalizes on multiple market cycles.

Summary:

A simple, consistent SIP is a fantastic way to build wealth. However, Value Averaging offers a more strategic approach that takes advantage of market movements. While it requires a bit more effort, its potential to lower your average cost and boost returns makes it a powerful tool for any serious investor to understand.

Regards,

Honvest Team.