Explainer of SIP Vs Step-Up & Value-Averaging Investment Plans with Calculation

For about two decades, systematic investment plans (SIPs) played an important role in driving goal-based investments into the markets. However, in the current investment environment, there is a lot of fuss about the different averaging techniques, be it rupee-cost averaging, step-up SIP or value averaging.

To clear this confusion, we are presenting a detailed illustration to give you clarity on how each form of averaging works.

Traditional or Standard SIP:

The Traditional or Standard SIP also called static SIP, is the method of averaging rupee cost by investing a similar amount on the same date of every month. The main objective of this method is to accumulate more units during the fall of NAV, thereby increasing the return on the investment.

Let us check the illustration of the returns generated by Axis Bluechip Fund for the last 5 years. SIP date is taken as 5th of every month for illustration purposes and the SIP amount is Rs.10,000/-

As per the above illustration, the total investment value during the period of 5 years is Rs.6,00,000/-, and the total corpus generated by a SIP of Rs.10,000/- is Rs. 8,15,553.49/- with an XIRR of 12.61%

Step-up SIP:

STEP-UP SIP is a method of investment where an investor increases their existing SIP value by a certain percentage in regular time frames. Due to its nature of increments in SIP value, this method is also called an Incremental SIP or Top-Up SIP.For detailed information on step-up SIP, please do check our blog https://adityatrading.in/posts/step-sip-essential-tool-wealth-creation/

Now let us check how the investment’s value and returns change when a step-up SIP is made during the same period. For the purpose of illustration, we have considered a 10% increase in the SIP amount of Rs.10,000/- per annum in the Axis Bluechip Fund.

While checking the results, the return is almost similar however the corpus generated at the end of the investment period is up by 19.11% i.e., Rs. 9,71,420.38/-, when compared to a standard SIP. This is because of the increased cash flows in the fund. While Rs. 6,00,000/- is the invested amount during the period of 5 years in standard SIP, Rs. 7,32,612/- is invested in Step-up SIP.

So, if you want more corpus in your hands at the end of the investment period, you can opt for a step-up SIP. But choosing the incremental percentage of the step-up remains a key determinant of the end corpus.

Value-Averaging Investment Plan (VIP):

Value-averaging is the method of investment where an investor tries to buy more units during the fall of the Net-asset Value of an investment based on the calculation of targeted returns.

When the market outperforms the monthly targeted corpus, we can choose a minimum investment to be made, in the below illustration minimum investment is Rs.7,000/- for an Rs.10,000/- value SIP. The minimum investment during the outperformed months will be determined based on an individual’s approach of accumulating units, the lower you invest the lower becomes the total investment and returns will be increased.

If we go through the results, we can understand that the amount invested is lower when compared to standard SIP. The part where we can see the improvement is in the return generated.

To summarise, a Standard SIP averages the cost of investment, a step-up SIP increases the corpus but returns are similar, and a value averaging plan increases the returns but investment and corpus remain low.

Thus, if an investor is looking for boosting the corpus and the end of the investment period then you should opt for Top-up SIP. If an investor is looking to boost the returns and is not concerned about the corpus at the end can opt for a value average investment plan.

There are few challenges in determining the monthly investment value of a Value-averaging investment plan because of the constantly changing NAV. However, we have created a prudent method to serve our clients for this purpose. For, support in creating a value investment plan, please write to us at research@adityatrading.com

To read more posts from ATS, check our blog at https://adityatrading.in/mutual-funds/https://adityatrading.in/mutual-funds/