RCA Vs VA: What is a Better Investment Route?

The ideal scenario for an investor would be to buy low and sell high, right? Unfortunately, this rarely happens. Thanks to constantly changing dynamics, timing your investments a futile exercise. For this reason, financial experts recommend adopting a more systematic l approach towards investment that keeps your emotions out.Rupee Cost Averaging (RCA) and Value Averaging (VA) are two popular concepts that help you do this. Let’s analyse these two options in detail.

Most people are familiar with RCA, aka SIP (Systematic Investment Plan) . Under this method, a fixed amount is invested at equal intervals, generally every month. The RCA fetches more units during choppy markets when the share price (NAV) dips and less when the price surges in a bull run. Capturing different market levels helps cut down the overall unit cost.Example: Say you invest Rs 5,000 every quarter via the RCA route. When NAV goes up to Rs 100 in Q2, you buy lesser units (5000/100=50), and when NAV falls to Rs 50, you accumulate more units (5000/50=100). Thus, your average investment cost over two quarters by investing a total of Rs 10000 and purchasing 150 units in total comes out to be - 10000/150=Rs 66.67 per unit.

With VA, the amount invested is flexible and varies as per market trends. The logic behind this approach is to maximise returns by buying low and selling high. VA focuses on having a long-term growth target which is essentially the ‘value path’. Investors adjust their contribution systematically (by adding or removing) when the target is under or overachieved.Example: Let’s assume you deposit Rs.10,000 every quarter, and the expected rate of growth is 10%. If the investment exceeds the set target at the end of Q1, the amount added in the Q2 will be proportionally lower and vice versa if there is a deficit.

Both investments have their strengths and weaknesses. RCA is an elementary investment technique that doesn’t require timing the market or constant monitoring of the portfolio. It is ideal for a conservative investor with an easy-going attitude.VA presents some challenges and calls for being on one’s toes. The investment mode works best for people with deep pockets as it requires cash infusion to fund shortfalls in market downturns. VA can produce a slightly superior return compared to RCA because the investor is always in control.Both RCA and VA are effective investment strategies in volatile markets. However, to reap benefits, the investor should be consistent and maintain a long-term perspective.

The information contained herein is generic in nature and is meant for educational purposes only. Nothing here is to be construed as an investment or financial or taxation advice nor to be considered as an invitation or solicitation or advertisement for any financial product. Readers are advised to exercise discretion and should seek independent professional advice prior to making any investment decision in relation to any financial product. Aditya Birla Capital Group is not liable for any decision arising out of the use of this information.