What is a Voluntary Accumulation Scheme?
Voluntary accumulation plans provide mutual fund investors with a way to accumulate large amounts of stock over time by investing a manageable fixed dollar amount on a regular basis, usually monthly. Small investors have the opportunity to take advantage of dollar cost averaging strategies.
Many mutual funds offer their clients the ability to do so.
Learn about the Voluntary Accumulation Program
As the name suggests, voluntary accumulation plans are executed at the discretion of the investor. Companies that offer mutual funds can set a minimum amount for these additional recurring purchases.
- Voluntary accumulation plans allow investors to set up automatic monthly purchases of stocks.
- This makes the dollar cost averaging strategy suitable for individual investors.
- Over time, investors should be able to acquire more shares of the fund at reasonable per-share prices.
It’s like an automatic savings plan. Investors approve recurring monthly payments to the fund, which are automatically used to purchase additional shares in the fund.
Investors get the convenience of automatic savings and the benefits of dollar cost averaging. This investment strategy requires regular purchases of the same stock or fund each month, no matter what the price is at the time.
How Dollar Cost Averaging Works
Using dollar cost averaging, investors get more mutual fund shares when prices are low and fewer shares when prices are high. Over time, stocks bought at the “right time” tend to outnumber stocks bought at the “wrong time.” Investors should end up getting a lot of stock at a reasonable price.
If you have a lot of cash on hand, invest in one lump sum. If not, a voluntary accumulation plan is a good option.
Voluntary accumulation plans are especially suitable for investors who want to build a solid portfolio but don’t have excess cash on hand. They can take the time to build their stake.
Limitations of Voluntary Accumulation Programs
Using a voluntary accumulation plan to mitigate the effects of volatile markets by averaging dollar costs has a lot of appeal, but it’s not the best decision for all investors.
Investors with a lot of cash on hand to invest in mutual funds are better off investing in one go.
This is mainly because it is better to invest in cash than to sit back and lose value due to inflation.
Some investors even avoid buying mutual funds that hold too much cash. It can drag on returns, especially during market upswings.
Investors who put lump sum money into mutual funds rather than diversify them through voluntary accumulation programs risk buying before the market corrects sharply. But statistically this is usually a better strategy.
Voluntary accumulation plans are a convenient and powerful tool for investors looking to build positions through paychecks. They should not be used as a reason to sit on cash.