Last Updated on December 18, 2021 at 10:46 pm
Among the many methods available to safeguard ones investment from stock market volatility, the most popular is to invest a fixed amount at periodic interval irrespective of market conditions. This is of course known in India as systematic investment plan or SIP.
One could add an aspect of market timing by gauging returns with respect to a target portfolio with a pre-determined return. If after a specified period (usually a month as in SIP) the actual portfolio is less (more) than the target portfolio, the investor increases (decreases) the investment amount. Thus this is equivalent to investing more on market lows and less on market highs. The investor will have to fix a target return and nominal investment with which the target portfolio is calculated. A minimum investment (to be made when portfolio exceeds target) and a maximum investment (to be made when portfolio falls short) also need to specified. This approach is known as value averaging investment plan or VIP. You can read more about this here.
Many people consider VIP a superior approach to SIP because although VIP does not always provide higher returns, the total VIP investment is expected to be typically lower. The answer to which is better depends on market trends that dominate the investment period. More importantly the effectiveness of any investment must always be checked with respect to the target portfolio.
🔥Secure your future with our Robo-advisory tool trusted by over 3,500 investors and advisors. From effortless retirement planning to funding your children’s biggest dreams, turn your financial goals into reality. 🔥
Subscribe for money management solutions via email! (Link takes you to our email sign-up form) Join 32,000+ readers in our community.
👉 New Tool Alert! NaviPlan: A Privacy-Focused Multi-asset Tracker and Goal Planner 👈
Recently I had analyzed a report by Fundsindia in which they have taken a few mutual funds and compared both investment strategies. I found that for 10 out the 16 studies reported both SIP and VIP modes outperformed the target portfolio and for 5 out 16 studies both unperformed. Thus it is a bit like ‘together we fall, together we conquer’.
We cannot jump to conclusions based on this result because: (1) 12 out of 16 studies reported were only for 3 year periods. (2) many of the funds are actively managed funds (as pointed out by Ramesh Mangal) (3) one should consider rolling averages over, say, a 10-year periods as Subra pointed out. To address the first two issues I have made a comparator with monthly Sensex returns (date source: Capitalmind). One can choose any investment time period between 1980 to 2012 and see how VIP and SIP strategies respond to different market conditions.
Ideally, if I choose a 10 year period then I must choose all 10-year periods between 1980-2012 (total of 24), average the performance and stare at the results before making conclusions. I will try and set this up in future. I think quite a bit interesting information can still be obtained by trying out a fixed investment period over different market conditions.
A look at the time evolution of Sensex suggests interesting periods to try out.
I: 1980-1991. A period of strong growth
II: 1991-2001. A disappointing period to say the least.
III: 2002-2007. A dream period (enough said!)
IV: 2009-2012. Recovery + consolidation (in the eyes of an optimist that is!)
You can of course play with any period of your choice. Here are some results for these periods. I have passed a verdict on each method. Hopefully it is easy enough to understand.
VIP results for period II (1991-2001) are bizarre! In this 11 year period the stock market gave negative returns. A person who had started a VIP in 1991 would have invested 195% more than someone following the SIP mode and would still have fallen short of his target by 80%. Quite easily the worst possible advertisement for VIP! When the markets do well (periods I and III) it does not matter which mode you choose you will reach your target (duh!) Period IV is too short to say anything concrete. One thing is for sure if next year 11 years turn out to be anything like period II, then investors in index funds are screwed! Actively managed funds can be expected to perform better. However they will have to do a lot better to enable investors achieve their goals. Perhaps intelligent stock picking is the only way in such market conditions.
Wait a minute! Haven’t we have heard that if one stays invested in the market for long periods there is virtually zero probability of loss. We have also seen in many places that ‘long periods’ means at least 15 years. So let us look at the results for every 15 year period from 1980 and 2012:
In 10 out of the 19 possible 15-year periods both VIP and SIP modes fell short of the target portfolio (53%) 🙁
In only 4/19 periods both VIP and SIP exceeded the target portfolio (21%)
In 4 out of the 5 remaining periods SIP scored over VIP!
Only once did VIP alone exceed the target portfolio.
That does it. As of now I am quite unimpressed with VIP. I think SIP will do the job as well. Commenting in the previous SIP vs. VIP post, Justgrowmymoney summed it up quite well:
“When saving for financial goals people must invest some amount each month. Trying to vary that can yield disastrous results. Simplest VIP is to do a regular SIP (for the goal) and try to contribute another 2-3k or so on days whenever markets fall nearly 2% (say like Apr 4, 2013). Never miss SIP no matter what.”
What is of more concern is a 53% failure of both modes in the periods studied. When the markets are heading nowhere (period II and now!), VIP can be disastrous idea. The problem is SIP doesn’t do its job either. I am quite uncomfortable about this. Of course one can take partial comfort in the fact that ‘target’ portfolio here represents ‘equity-target’ portfolio and not ‘goal-target’ portfolio. So a diversified portfolio which has significant non-equity components (debt, gold, real estate etc.) will not suffer as much. To me these results suggest the following:
- Invest substantially in equity only if your goal is at least 15 years away
- Even then the equity component should be limited to somewhere between 60-40% irrespective of age, risk-appetite.
- Do not expect 15% from equity long-term or very long term. My goal calculations are all based only on 10% returns from equity. Nothing is guaranteed and a fall is a fall. Just that I prefer a drop from the 1st floor rather than the 5th floor.
- Ensure you invest each month systematically irrespective of market conditions.
- When the going is good, book some profit. Either systematically (that is rebalance with specific equity component in mind) or randomly (book some profit!). Ensure the booked profit is immediately reinvested in a debt instrument with minimum tax out-go.
- Investing in equity is the best bet to beat inflation. Remember it just a bet not a guarantee.
What do you infer from the above? Do you agree with me? Try out the calculator for different periods of your choice. If you find something interesting please let me know.
Download the SIP vs VIP Comparator with Sensex Returns (xlsx file)
(.xlsx file made with Excel 2010. Except CAGR cells works with Excel 2007)
Download the SIP vs VIP Comparator with Sensex Returns
(.xls file Except CAGR cells works with Excel 2002)
We are on Google News
Use this button to add freefincal.com as a preferred personal finance source on Google News.
Explore 1,400+ videos on YouTube!
Subscribe to get posts via email!
Join 32,000+ readers and get free money management solutions delivered to your inbox! (Link takes you to our email sign-up form)Join our WhatsApp Channel
Explore our products
🔥Join our community of 9000+ users! 🔥- Use our Robo-advisory Tool to create a complete financial plan! More than 3,500 investors and advisors use this! Use the discount code robo25 for 20% off. Plan your retirement (early, normal, before, and after), plus non-recurring financial goals (such as child education) and recurring financial goals (such as holidays and appliance purchases). The tool helps anyone aged 18 to 80 plan for retirement, plus six non-recurring and four recurring financial goals, with a detailed cash flow summary.
- Our Flagship Course! Learn to manage your portfolio like a pro to achieve your goals regardless of market conditions! More than 3,500 investors and advisors are part of our exclusive community! Get clarity on how to plan for your goals and achieve the necessary corpus no matter the market conditions! Watch the first lecture for free! One-time payment! No recurring fees! Lifelong access to videos! Reduce fear, uncertainty and doubt while investing! Learn how to plan for your goals before and after retirement with confidence.
- Join the freefincal investor circle! An exclusive space for investors, advisors, fintech employees and students to access financial planning and insurance tools, mutual fund and stock analysis tools, coding strategies and Excel macros for data extraction. 750+ members are now part of our investor circle.
- Increase your income by getting people to pay for your skills! More than 900 salaried employees, entrepreneurs and financial advisors are part of our exclusive community! Learn how to get people to pay for your skills! Whether you are a professional or small business owner seeking more clients through online visibility, or a salaried individual looking for side or passive income, we will show you how to do it by showcasing your skills and building a community that trusts and pays you. (Watch the 1st lecture for free). One-time payment! No recurring fees! Lifelong access to videos!
- Portfolio Tracker! Track your mutual funds and stock investments with our Google Sheet!
- We also publish monthly screeners for
Our Podcast: Let's Get Rich With Pattu
On Spotify: Let's Get RICH With PATTU! Every single Indian CAN grow their wealth! On Audible: Listen to the Let's Get Rich with Pattu Podcast
Listen to the Let's Get Rich With Pattu podcast on YouTube.
Now watch Let's Get Rich With Pattu தமிழில் (in Tamil)!About The Author
Dr M Pattabiraman giving a lecture
- Dr M. Pattabiraman (PhD) is the founder, managing editor and primary author of freefincal. He is an associate professor at the Indian Institute of Technology, Madras.
- He has over 14 years of experience publishing news analysis, research and financial product development. He has over 28 years of teaching and research experience. He is also a public speaker and keynote presenter.
- He is a patron and co-founder of “Fee-only India,” an organisation promoting unbiased, commission-free, AUM-independent investment advice.
- Connect with him via @pattufreefincal on X LinkedIn YouTube
- Pattabiraman has co-authored three print books.
This book helps you ask the right questions and find the right answers. It also includes nine online calculators to create custom solutions.
(2) Gamechanger: Forget Startups, Join Corporate & Still Live the Rich Life You Want. 
Both the boy and girl versions of "Chinchu Gets a Superpower".
Most investor problems stem from a lack of poor decision-making. We made bad decisions and money mistakes when we started earning, and we spent years undoing them. Why should our children go through the same pain? What is this book about? As parents, what if we had to groom one ability in our children that matters not only for money management and investing but for every aspect of life? My answer: Sound decision-making. So, in this book, we meet Chinchu, who is about to turn 10. The story follows what he wants for his birthday and how his parents plan it, while also teaching him key ideas about decision-making and money management. What readers say! 
Feedback from a young reader after reading Chinchu Gets a Superpower!
Must-read book even for adults! This is something that every parent should teach their kids right from a young age. The importance of money management and decision-making based on their wants and needs. Very nicely written in simple terms. - Arun.
About freefincal & its content policy
Freefincal is a News Media organisation dedicated to providing original analysis, reports, reviews and insights on mutual funds, stocks, investing, retirement and personal finance developments. We do so without conflict of interest and bias. Follow us on Google News. Freefincal serves more than three million readers a year (5 million page views) with articles based only on factual information and detailed analysis by its authors. All statements made will be verified with credible and knowledgeable sources before publication. Freefincal does not publish paid articles, promotions, PR, satire or opinions without data. All opinions will be inferences backed by verifiable, reproducible evidence/data. Contact Information: To get in touch, please use our contact form. (Sponsored posts or paid collaborations will not be entertained.)Our publications
- Your Ultimate Guide to Travel. This is an in-depth exploration of vacation planning, including how to find affordable flights, budget accommodations, and practical travel tips. It also examines the benefits of travelling slowly, both financially and psychologically, with links to relevant web pages and guidance at every step. Get the PDF for Rs 300 (instant download)
- How to profit from content writing: Our ebook is for those interested in getting a side income via content writing. It is available at a 50% discount for Rs. 500 only!