SIP or VIP! How to decide?

Today many investors are familiar with the various sensible investment options. One such sagacious way of investment is SIP or systematic investment plan. Purchasing mutual fund units through SIP gives the investors the cushion to withstand market volatility and help make money in the long run.

But have you heard about one more product that is deemed to be more powerful than SIPs? An investment route that is touted to give better returns than a SIP! Interested? Take a look.

What is VIP?

With more MFs competing in the market there is no dearth for innovative products and services. One such innovation is the Value Investment Plan or VIP.  Though similar to the SIP in some ways this product is considered to be more active than SIP. Literally new to the market, VIP is available only with benchmark MF who has come out with this type of plan christening it "Benchmark S&P CNX 500 Fund (B500)".

How does it work?

The only similarity between a MF investment through SIP and through VIP is that some money is contributed every month. Now to the differences between the two. Unlike in the SIP where a fixed monthly contribution is made, your monthly contribution in a VIP is never fixed and is calculated in a different way.

For example, in the VIP an investor decides to invest Rs 2,000 every month. When the first month ends, the investor would sit down to analyze if his first investment has made 1 percent or not. If his investment has made more than one per cent then he could limit his second month investment of Rs. 2,000 to the extent of the surplus in his portfolio. On the flip side, if the investment has nose-dived below the 1 percent mark then the investor will invest more than his monthly target of Rs 2, 000 to equalise the level.

How does it compare with SIP?

For example in SIP, if the investor wants to invest Rs 30, 000 per annum it would be done over a 12 month period of Rs 2500 every month! SIP gives you the advantage from rupee cost averaging and saves you from the hassles of timing the market.

You contribute a fixed amount every month and when the markets are up your investment amount will buy you only lesser units but when the markets are down you could get more units for the same price. That is you can purchase 250 units @ Rs.10 NAV for Rs 2500 but when the NAV goes up to Rs 11 the same Rs 2500 can only buy less number of units! And you can buy more units for the same amount when the NAV is down! With SIP's power of compounding you could get better returns over a longer period of time.

Consider the same example in the VIP route: The VIP doesn't involve contributing fixed money every month. Instead, you choose to invest more and gain more units when markets are down and stay away when markets are high. Thus when the NAV is down, you can invest more to buy more units and when the NAV is higher you can just stay away from the markets.

Pros and cons of VIP

Based on market average growth pattern, VIP investment could give better returns than an SIP during volatile market conditions. You have more control over when to buy and when not to thus saving yourself from the losses of buying lesser number of units when the markets are doing good.

Perhaps the greatest disadvantage with VIP is that your contributions will be zero when the markets grown by a wide margin as was the case during the three years between 2004 and 2007 when the markets registered a good 20 to 40 per cent growth.

Also, you might require more money as investments when the markets are facing a slump. Moreover unlike the SIP where you do not have to worry about timing the markets the VIP route requires you to watch the market trends and act accordingly.

How to decide whether to opt for SIP or VIP?

Both VIP and SIP have their own advantages and disadvantages. At the end everything boils down to knowing your priorities in determining if VIP or SIP will suit you! It also depends on other factors like the amount you are willing to invest in MFs.

The VIP monthly contributions will vary according to the market conditions and hence differ every month based on the last month's returns while SIP monthly contributions will be fixed every month. However, VIP could give you better value for your investment and you could capitalise on down market conditions to buy more units. Also, the returns are maximised in VIP and optimised in SIP.