Source: IRIS (31-MAY-12)
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)