Definition
Value Averaging (VA) is a systematic investment strategy where an investor adjusts their investment amount each period (e.g., monthly or quarterly) to ensure the total portfolio value increases by a fixed amount over time, unlike Systematic Investment Plans (SIPs) where the amount invested is constant.
The investor contributes more when markets fall and less when markets rise, thereby buying more units when prices are low and fewer when high. Over time, this potentially leads to better returns than traditional rupee-cost averaging, though it involves more complexity and capital commitment.
Case Study
Rohini, a 35-year-old investor from Hyderabad, decides to follow a value averaging approach for her mutual fund investments. Instead of investing a fixed amount every month like in an SIP, she adjusts her investment based on the portfolio’s performance. She sets a target portfolio value that should increase by ₹5,000 every month. In the first month, she invests ₹5,000. By the second month, her portfolio value is ₹9,500 instead of ₹10,000 due to a small market correction, so she invests ₹5,500 to make up the shortfall. In the third month, her portfolio grows to ₹16,000, exceeding her ₹15,000 target, so she invests only ₹4,000 that month. This disciplined method ensures she invests more when prices are low and less when prices are high, resulting in a lower average cost per unit. Over time, Rohini achieves better risk-adjusted returns compared to fixed SIP investing because she systematically buys more during downturns and less during rallies.
Historical Reference
- 1988: First formalized by Michael E. Edleson in his book “Value Averaging: The Safe and Easy Strategy for Higher Investment Returns”
- 2000s: Adopted in high-net-worth and goal-based advisory models
- India (Post-2010): Gained traction among DIY investors and fee-only planners as SIP alternatives
- Present: Tools now available in robo-advisory platforms to automate value averaging logic