Value averaging is an investing approach which works like rupee cost averaging. In value averaging, the investor fixes a long term target to achieve from a portfolio of assets. Based on market condition and prices of the stock, systematically the investor will then add to or remove from the portfolio to achieve the long term objective.
Let us understand value averaging with an example.
Suppose you have decided to grow your portfolio by Rs 20,000 every month. At the end of month one, you buy 100 units of the mutual fund at the rate of Rs 200 per unit Net asset value (NAV).
By the end of month two, at the per unit NAV of 210, the value of your investment is Rs 21,000. To achieve your target of Rs 40,000, now you have to invest Rs 19,000. Which means you will be adding around 90.47 units of the mutual fund @ 210 per unit NAV. Now, the total units owned by you is 190.47.
At the end of month three, suppose your per unit NAV is Rs 180. Your overall portfolio has shrunk to Rs 34,286. To achieve the target of Rs 60,000, you need to invest Rs 25,714. You bought 142.85 units at the per unit NAV of Rs 180 at a total cost of Rs 25,714 to achieve a total portfolio value of Rs 60,000 by the end of month three.
Similarly at the end of the fourth month at a per unit NAV of Rs 160, you need to buy 166.66 units to achieve the target of Rs 80,000. By doing so you have accumulated 500 units of the mutual fund at an average price of Rs 160.
Assume for a moment that the per unit NAV has gone up to Rs 190 by the end of the fifth month. Now at the end of the fifth month, your portfolio value is Rs 95,000 (i.e. 190*500). To achieve the target of Rs 1,00,000 at the end of the fifth month, you need to invest only Rs 5,000 at Rs 190 per unit NAV. By doing so you have invested Rs 5,000 to get 26.32 units.
After investing, you have a total of 526.31 units at an average price of Rs 190 per unit NAV, which is Rs 1,00,000.
| End of the Month | Value path | Portfolio value at the end of the month | Deficit or investment | Units purchased | Per unit NAV | Total units owned | Portfolio value |
| 1 | 20,000 | 20,000 | 20,000 | 100.00 | 200 | 100.00 | 20,000 |
| 2 | 40,000 | 21,000 | 19,000 | 90.48 | 210 | 190.48 | 40,000 |
| 3 | 60,000 | 34,286 | 25,714 | 142.86 | 180 | 333.33 | 60,000 |
| 4 | 80,000 | 53,333 | 26,667 | 166.67 | 160 | 500.00 | 80,000 |
| 5 | 1,00,000 | 95,000 | 5,000 | 26.32 | 190 | 526.32 | 1,00,000 |
This way you can achieve your target in the long run. Depending on the rise and fall of the market, you need to adjust your investment to achieve the target.
The main objective is to acquire more shares when prices are falling and get fewer shares when prices are rising.
Rupee cost averaging Vs Value averaging
In rupee cost averaging, you need to invest a fixed amount of money every month irrespective of the market condition.
However, in value averaging, you need to calculate your portfolio value at the end of the period and adjust your investing portfolio accordingly. In our above example, we have shown how you have to adjust. But when your portfolio is growing at a faster rate, then to remain within your target you may require to sell a certain amount to adjust your portfolio.
The biggest problem in value averaging is that your per month/quarter investment is not fixed. It changes based on market behaviour. When your portfolio declines substantially, you might require a higher amount to invest in order to achieve the target fund. For that you have to have adequate capital ideal for investment.
However, it helps to achieve a financial goal to raise funds.
Both rupee cost averaging and value averaging require disciplined investing. If you have access to limited funds and are interested in investing a fixed amount every month/quarter in order to get a good return for a long term goal, then rupee cost averaging is a better way. For salaried employees, a systematic investment plan (known as rupee cost averaging) is a better way to make money in the long term.
Disclaimer: In addition to the disclaimer below, please note, this article is for information purposes only. Mutual Fund investments are subject to market risks, read all scheme related documents carefully before investing. Any mutual fund listed in the document or in our website does not guarantee fund performance or its underlying creditworthiness. Specific investment needs and other factors have to be taken into account while designing a mutual fund portfolio. Readers seeking to engage in investing should seek out extensive education on the topic and help of professionals.
