Consider this: you plan to invest Rs 1,000 a month and expect an annual return of 15 per cent. Say, for instance, at the end of month three your portfolio value is Rs 3,500 and the expected portfolio value for the fourth month is Rs 4,027. Therefore, next month you will invest only Rs 527 (difference between target and actual portfolio value).

Difference in returns. This technique is superior to SIPs as it gives you the weighted average. The cost incurred in acquisition of units is less compared with that of an SIP. We took two periods: Jan 2006 to Jan 2007 and Jan 2008 to Jan 2009. During calendar year 2006, markets were rising. During this phase, an investment of Rs 60,000 through SIPs in an equity fund would have given you Rs 69,878 in return — a gain of 16 per cent. During the same period, a VIP with a target return of 15 per cent would have given you a higher return of 19.5 per cent.

Next, we looked at returns during the bear phase of January 2008-09. A lump sum investment of Rs 60,000 would have yielded -49 per cent return; an SIP would have given a return of -18.70 per cent while a VIP would have given -19.3 per cent return.

From Jan 2008 till May 1 this year, the return on a lump sum investment would have been

-40 per cent. An SIP of Rs 5,000 a month would have yielded -22 per cent return and a VIP, 0.67 per cent return.

... contd.