Cost Averaging vs. Value Averaging – All you need to know about it
If you are investing in mutual funds or thinking of it, you may have come across these two terms – cost averaging and value averaging. These are two methods of investment in mutual funds and can help you create wealth in several ways. If you want to find out which of these is a better match for your investment strategy and purpose, you should keep reading further.
|Points of difference||Cost Averaging||Value Averaging|
|Meaning||Cost averaging is another word for a SIP or a systematic investment plan. Under this method of investment, you invest a fixed sum of money at a chosen frequency. For instance, you can invest Rs. 500 in a mutual fund every month for 10 years.||Value averaging is also a type of SIP. However, under this, the value of the SIP is not fixed. It is determined based on the market.|
|Process||With cost averaging, you can get more units when the net asset value (NAV) declines. However, when the value of NAV increases, you will be able to buy fewer units. For example, if the NAV is Rs. 100, you can buy 5 units with a SIP of Rs. 500. If the price rises to Rs. 150, you will be able to buy only 3 units with a SIP of Rs. 500. This method is known as rupee cost averaging, as it averages out the cost over the long term.||
The SIP in value averaging depends on the market conditions. If the market is booming, the amount of money you invest is reduced. Likewise, in a falling market, the investment amount is increased.
In a value averaging SIP plan, you have to specify the upper and lower limit. So, for example, if your lower limit is Rs. 1500 and the upper limit is Rs. 3000, your SIPs will range between these amounts, depending on the changing market scenarios.
|Returns||Cost averaging may deliver lower returns from mutual funds compared to value averaging.||Value averaging can deliver higher returns in comparison.|
|Suitability||Cost averaging may be more suitable for those who do not have the time to pay attention to the market forces. There is a fixed SIP amount that gets invested into the mutual funds of your choice. As a result, your wealth grows steadily, and your present budget does not get impacted at all.||
The higher values of value averaging may seem like a burden on your monthly budget. Moreover, this method may require some more effort from the investor.
To sum it up
You can choose any of these methods as per your investment purpose and target. Value averaging may take you to your goal sooner, but it can also require some effort from your end. On the other hand, cost averaging can be suitable for any kind of investor, as it is hassle-free and helps to stay steady on your goal.
The Tata Capital Moneyfy app can help you invest in mutual funds using any of these methods. You can download the Moneyfy app on Android and iOS.