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Wednesday, July 20, 2011

SIP vs. VIP- Everything You Always Wanted To Know

SIP stands for Systematic Investment Plan, where investor invests a fixed amount of money to buy MF (Mutual Fund) units at regular interval generally monthly (or quarterly). Investment can be easily done by ECS (Electronic Clearing System) without bothering about due date.
It is similar to Recurring deposit where fixed amount of money is deposited at regular interval with only difference that SIP investor gets MF units.
Under SIP, When NAV of MF goes down investor gets more units for his fixed investment and when market goes up, investor gets lesser units.
Main benefit of SIP is, it saves investor from steep market falls like Jan 2008 but on other side it deprives investor from major market rise like May 2009; but primary motive of investors is capital protection and higher returns are meaningless if seed capital is at risk.
SIP really helps investors in longer horizon and its disciplined way of investing using the concept of dollar (or Rupee) cost averaging.
Even investors, who don’t have lump sum money to invest, can invest through SIP.
During continuous uptrend for a longer period, dollar cost averaging does not work well as investor gets lesser and lesser units due to rising market.
Concept of VIP (value investment plan) was originated by a Harvard professor.
 In VIP instead of investing fixed amount, variable amount is invested; when market falls, more money is invested and when market raises, lesser amount is invested, based on formula based rules.
Under VIP, minimum amount to be invested is 0(i.e. no investment at all) and maximum amount is as per limit specified by the investor.
But VIP has its drawbacks too, unlike SIP, investor never knows what amount he has to pay in coming month and disposal of more amounts may go against his liquidity position.
VIP may not be viable when market remains in one direction for very long time but works well when market remains volatile in a range.

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