Value-averaging investment plan from Benchmark AMC

Benchmark AMC has offered investors with a value averaging investment plan with Benchmark S&P CNX 500 Fund. Value-averaging investment plan (VIP) is an investment strategy that works well in volatile markets.

VIP is an averaging technique aimed at achieving a defined return, irrespective of a market movement. In this case, the investor invests more when markets are down and invests less when markets move up. The investor keeps a target long-term rate of interest in mind and applies the same while ascertaining the investment amount per month.

For the purpose of understanding, let us assume an investor who intends to make 12% per annum on his portfolio. He invests Rs 10,000 per month. At the end of the first month, he would see if his maiden instalment has earned 1%. If the value of the first instalment is more than that, then the next instalment is less than Rs 10,000 to the extent of the surplus in the portfolio.

If the value of the portfolio is short of the desired level of portfolio, he will invest an amount (more than Rs 10,000) to match the desired level.

Benchmark offering employs the same technique and allows the investors to invest in their S&P CNX 500 fund in a disciplined manner. This is an index fund. The product has assumed 15% rate of return per annum for this product. The minimum nominal investment amount shall be Rs 2,000.

The investor has to define the maximum monthly debit amount per month in the fund, which should be higher than the nominal investment amount. Though the fund does not charge any entry load, for the investment amount of less than Rs 2 crore, there is an exit load of 1.5% if you redeem your investments in one year from the date of allotment.

The exit loads go down and become zero if you hold on to the units for at least three years, from the date of allotment.

The scheme works the best in volatile markets. Due to this disciplined approach, the investors can resort to bottom fishing. At the same time, she commits less money in overheated markets. In other words, the scheme allows investors to invest in equities in most dispassionate manner.

The scheme has chosen the S&P CNX 500 fund, which is a broad-based index fund and allows the investor to participate in the market at low cost and with no fund manager risk.

In a secular bull market, an investor with a short-term horizon may not benefit form this scheme. One needs to have a long-term horizon of at least three years. VIP is offered in an index fund. Experts argue that there is a scope for outperformance in relatively inefficient market in India. If you believe in this argument and can identify the outperformers in the market, then this product may not appeal to you.

Why go for it: A disciplined approach to invest in broad market with least headache.

Why avoid: Being an index fund, one may not be in a position to capture the possible alpha — the excess over market returns