FundsIndia in the News

VIPs have the potential to outperform SIPs
By Kumar Shankar Roy Jan 13 2010 , Kolkata

Fundsindia.com, Ind­ia's first online-only investment platform, announced on Wednesday the launch of a value-averaging investment plan (VIP) across the spectrum of equity mutual funds (MFs). Investors will be able to avail this promising new method of investing, which offers the potential of outperforming the traditional systematic investment Plan (SIP).

So far, only Benchmark Mutual Fund offered the VIP facility in its S&P CNX 500 Fund. But now investors in different MF houses can utilise the VIP plan across hundreds of equity (growth) schemes of at least 26 fund houses available with FundsIndia.

The VIP method of investing is similar to the SIP method in that the investments are made periodically into an investment vehicle over a length of time. Such a mechanism results in a higher rate of return compared to an SIP, said Srikanth Meenakshi of Chennai-based Wealth India Financial Services, which runs www.fundsindia.com.

However, unlike an SIP, the amount of money invested every period is different and is calculated using a formula. The formula used to calculate the amount of money to invest in any given period is based on how the investment has performed in the past period.

"We tested the VIP method in the Indian equity market context using four equity schemes from four different fund houses," said Shankar Bhatt, a financial adviser with FundsIndia.

"We did this test over the past five years, between October 2004 and October 2009. What we found was that the average VIP investment outperformed comparable SIP investment by an average of 1.664 per cent compounded annual growth rate (CAGR). The results were promising enough for us to consider creating an investment product out of it for our investors," Bhatt said. Bhatt, however, cautions that past outperformance is no guarantee of future outperformance.

The VIP method was first designed in 1988 by Michael Edelson, a professor at the Harvard University. The basic premise is that money is invested in periodic intervals in a portfolio in such a manner that the portfolio tries to approach a target rate of return.

Since a portfolio might grow in a particular month, and shrink another month, the targeted value for the portfolio might come nearer to or recede farther from the actual value. The subsequent investment tries to compensate for this movement by investing less or more in the portfolio.