Dilzer Consultants - Investments and Financial Planning

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   SEBI REGISTERED INVESTMENT ADVISOR

Systematic Investment Plan

A disciplined approach to investing

Time Value of MoneyYou’d be amazed what you could achieve by setting aside a small sum of money regularly. small sums(even of a few hundred rupees) saved in wise investments over long periods of time can result in a substantial sum of money, thanks to the Power of Compounding. Compounding is when your investments generate earnings on reinvested earnings. This ensures that every single rupee you invest constantly works hard for you.

INVESTING USING THE SYSTEMATIC INVESTMENT PLAN HAS MANY BENEFITS:

  • It disciplines you to save regularly rather than arbitarily.
  • You can save in small amounts
  • Your investments have a chance to grow because of compounding benefits.
  • It helps reduce the risk of timing the markets.
  • Most importantly, it brings down the average cost of your investments(a Rupee saved is a Rupee earned).

NAV Movement

Month Amount Invested in Rs. Rising Market Units Falling Market Units Fluctuating Market Units
1. 1000 12 83.333 12 083.333 12 83.33333
2. 1000 14 71.492 10 100.000 15 66.66667
3. 1000 15 66.667 8 125.000 9 111.1111
4. 1000 18 55.556 6 166.670 12 83.33333
Total 4000 59 276.984 36 475.000 48 344.444

 

 

Rising Market Falling Market Fluctuating Market
Average Purchase Price 14.75 9 12
Per Unit Per month (59/4) (36/4) (48/4)
Average cost per unit 14.44 8.42 11.61
(4000/276.984)

As can be seen from the above examples, you automatically gain without having to monitor the market or attempting to predict the market for purchasing the units.

A Systematic Investment plan allows a minimum of Rs 500 to be invested every month or quarter for a minimum of 6 months.By investing regular sums of money, it allows you to make the volitilities of the market to work in your favour.Since the amount invested every month is a constant, the investor ends up buying more units when the price is low and fewer units when the price is high. Therefore, the average unit cost will always be lower than the average purchase price per unit irrespective of the market rising, falling or fluctuating.

This concept is called : Rupee Cost Averaging.

Where should you invest?

If you prefer moderate returns with limited risk then we recommend the Balanced Fund or if you are looking for long term capital appreciation, we recommend the Growth Plan.

The following table gives the details an example.

Scheme Initial

Investment(Rs.)

Minimum Post dated Cheques
Monthly SIP Quarterly SIP
Balanced Fund 3,000 1,000 1,500
Growth Fund 3,000 500 1,500

How do you get started?

It’s Simple:

  • Ask for the application form and fill the same.
  • Towards the initial investment, please write a cheque (minimum amount) plus write our 4 Post dated cheques(incase of quarterly) or 12 post dated cheques (incase of monthly).

http://www.myiris.com/financial/storyShow.php?fileR=20120531161627715&dir=2012/05/31

 

The benefit of Value Cost Averaging (VCA) over Rupee Cost Averaging(SIP).

The basic tenant of investing is buying low and selling high. However, this principal, is often never put to use, because fear, greed are stronger than long term investing discipline.

What is even sadder is the public, normally buys at highs and sells at lows, which grossly undermines returns and the investor, ends up loosing money and not being happy with the investment decision or the financial planner.

The basic tenant of investing systematically through a disciplined and long term savings approach would create wealth in abundance for the investor.

Value Cost Averaging (VCA), is an investment technique similar to Systematic Investing (SIP), where investments are made systematically over a period of time, but the quantum of investment in VCA changes depending on market fluctuation.

This ensures your portfolio value rises by a specified amount at every installment period, regardless of market conditions.

Sounds interesting..? Read on.

VCA enables financial planners reach the desired goal amount in a more predictable manner.

VCA fixes a target amount each month, and ensures this target amount is maintained every month, irrespective of the market price. Therefore, the investor, buys or sells, only those units that are required to maintain the predestined portfolio worth at each revaluation point, which is typically every month.

Therefore, the simple principal is, in falling markets, one buys more units and in rising markets, one buys fewer units or may even require to sell some units to maintain the target portfolio amount.

In Systematic Investment Plan(SIP) a fixed amount is invested every month, irrespective of the predetermined portfolio value. This is also called Rupee Cost Averaging.

Therefore, the distinctive feature of VCA over SIP or rupee cost averaging is as a rule, VCA may also result in selling some units, to maintain the desired portfolio target, which SIP does not do.

 

 

An illustration is provided below on the workings of VCA and SIP

 

Variable Investment Plan (Value Cost Averaging concept)
VIP Investing

Month NAV Target Portfolio amount Cumulative units Units Purchased/ Sold Amount Invested per month
1 10 1000 100.00 100 1000
2 12 2000 166.67  66.67   800
3 16 3000 187.50  20.83   333
4 12 4000 333.33 145.83 1750
5 17 5000 294.11 -39.22 -666.74
6 15 6000 400.00 106  1590
Total Amount Invested 13.66 6000 400.00 400.00 4807
Average cost per unit 12.01

Systematic Investment Plan (Rupee Cost Averaging concept, using the same figures)

Month NAV Target Portfolio amount Cumulative units Units Purchased Amount Invested per month
1 10 1000 100.00 100 1000
2 12 1000 183.33  83.33 1000
3 16 1000 245.83 62.50 1000
4 12 1000 329.16 83.33 1000
5 17 1000 387.98 58.82 1000
6 15 1000 454.65  66.67 1000
Total Amount Invested 13.66 6000 454.65 454.65 6000
Average cost per unit 13.19

 

 

Illustration of Variable Investment Plan or Value Cost Averaging in a Rising Market

Month NAV Target Portfolio amount Cumulative units Units Purchased/ Sold Amount Invested per month
1 10 1000 100.00 100 1000
2 14 2000 142.85 42.85   600
3 16 3000 187.50 44.65   714
4 18 4000 222.22 34.72   625
5 26 5000 192.30 -29.92 -778
6 26 6000 230.76   38.46  1000
Total Amount Invested 18.33 6000 240.00 640.00 3161
Average cost per unit 13.17

 

Illustration of Variable Investment Plan or Value Cost Averaging in a Falling Market

Month NAV Target Portfolio amount Cumulative units Units Purchased/ Sold Amount Invested per month
1 40 1000 25.00 25.00 1000
2 34 2000 58.82 33.82 1150
3 32 3000 93.75 34.93 1117
4 32 4000 125.00 31.25 1000
5 16 5000 312.50 187.50 3000
6 10 6000 600.00  287.50 2875
Total Amount Invested 27.33 6000 600.00 600.00 10142
Average cost per unit 16.90

 

Therefore Value Cost Averaging helps in achieving:

  1. Lower Average Cost per unit when compared to SIP.
  2. Reduces Portfolio Volatility.
  3. Helps achieve goal based target value.

 

While, this is an excellent option, most funds barring a few, do not have this unique technique to offer investors.

(Contributed by Dilshad Billimoria Certified Financial Planner and Investment Advisor)

Can be reached at dilzerconsultants@gmail.com

All the above questions can be answered by a trust worthy and competent financial planner.

For more details contact us