SIP vs VIP

SIP - Systematic Investment Plan

An SIP is a mode of investment whereby the investor, invest a pre-determined amount on a monthly basis, on a pre-determined date, into a particular Mutual Fund Scheme. It is the most commonly use method of investment by individual investor today.

Advantages of SIP

• It gives an investor a benefit of rupee cost averaging. As investor buying every month, so he or she will be buying at dips and rises. So, over the time period investor is averaging his/her cost.
• It gives an investor a power of compounding.
• It helps an investor to avoid panic selling.
• An investor can start investing with a small amount of money say 500 rupees.
• An SIP effectively stops you from trying to time the market and bring financial discipline into investors investing method. 
• An SIP cut downs paper work which investor need to do,  with single form an investor can invest for 10 or more years into your chosen MF scheme. 

  

VIP - Value Averaging Investment Plan 

Value Averaging Investment Plan is an investing strategy that actually works on similar terms of steady monthly contributions as SIP, but it differs in its approach to the amount of each monthly contribution. In value averaging, the investor sets a target growth rate or amount on his portfolio each month, and then adjusts the next month's contribution according to the relative gain or shortfall made on the original portfolio.

Advantages of VIP

• It invests more rupee amount when markets are lower and less when markets are higher.
• In most cases it generates higher returns than normal SIP which is based on rupee cost averaging.
• It achieves lower cost of acquisition in most scenarios as compared to SIP.
• The probability of achieving target value for a portfolio is much higher and hence ideal for financial planning.
• Longer the investor horizon, higher the benefits from it.

Challenges in VIP

• The sum which investor invest each month will be highly unpredictable. So, its difficult for salaried individual whose income is constant to commit to a VIP knowing that the sums debited to his account may vary so widely. 
• In long term and constantly falling markets the investment amount may increase mush beyond the investor's cash flow.
• VIP is most effective when the market is not moving in one direction. If on starting the VIP the market is in steady decline foe many months, investors in a VIP would find themselves committing   larger sums to the equity fund, even while the investment loss value.
• In rising market it generates sell which may result in unwarranted short-term taxation and transaction charges.

Let's see how both the strategies works with an example :- 

Suppose, we are investing in any ABC mutual fund. We use both the strategies, considering that ABC Scheme's NAV's for last one year on a monthly basis. While investing in SIP Strategy, we invested Rs. 5000 per month, on a fixed date, we invest a total of Rs60000 per year and accumulate 3378 units totally. This gives us an average unit price of Rs. 18.30 with rate of return of 20.86%.

Under VIP strategy, we modify our investment every month such that if market rise we purchase less and if it dips we buy more. we invest a total of 57446 over 12 months and accumlate total 3235 units at an average price of 17.76 with rate of return 26.42%.

SIP
Date	NAV	SIP Amount (Rs.)	Units bought
1-Sep-10	20	5,000	250
1-Oct-10	19	5,000	263.16
1-Nov-10	18	5,000	277.78
1-Dec-10	19	5,000	263.16
3-Jan-11	20	5,000	250
1-Feb-11	21	5,000	238.1
1-Mar-11	18	5,000	277.78
1-Apr-11	15	5,000	333.33
1-May-11	16.5	5,000	303.03
1-Jun-11	18	5,000	277.78
1-Jul-11	17	5,000	294.12
1-Aug-11	20	5,000	250
Total Units Purchased	3,278.23
Total Amount Invested	60,000
Average price per unit	18.3
Portfolio Market Value as on 1-Aug-11	65,565
Internal Rate of Return	20.86%

VIP
Date	NAV	Target Amount	Amount Invested (Rs.)	Units Bought / Sold
1-Sep-10	20	5,000	5,000	250
1-Oct-10	19	10,000	5,250.00	276.32
1-Nov-10	18	15,000	15,000.00	833.33
1-Dec-10	19	20,000	20,000.00	1,052.63
3-Jan-11	20	25,000	25,000.00	1,250.00
1-Feb-11	21	30,000	30,000.00	1,428.57
1-Mar-11	18	35,000	35,000.00	1,944.44
1-Apr-11	15	40,000	40,000.00	2,666.67
1-May-11	16.5	45,000	45,000.00	2,727.27
1-Jun-11	18	50,000	50,000.00	2,777.78
1-Jul-11	17	55,000	55,000.00	3,235.29
1-Aug-11	20	60,000	-	-
Total Units Purchased	3,235.29
Total Amount Invested	57,446
Average price per unit	17.76
Portfolio Market Value as on 1-Aug-11	64,706
Internal Rate of Return	26.42%

(Source : PersonalFn )

Both the methods sound similar at first place, but after looking closely you'll see that they are actually quite different. Above example suggest that the VIP delivers a higher return on an average as compared to SIP. As an investor its up to you what you can and should do. If you have financial plan, then I would suggest that you need to invest a fixed amount across certain scheme for long-term and you need to avoid market timing altogether. in that case, SIP would be more suitable for you than VIP.