Voluntary Accumulation Plan
What is a Voluntary Accumulation Plan?
A voluntary accumulation plan is a plan that allows mutual fund investors to purchase shares consistently to develop their investment over a period of time. It usually refers to shareholders putting in a fixed amount of money regularly regardless of the number of shares that can be bought with that money.
A voluntary accumulation plan lowers the average price that the investor pays for one share. Therefore, if an investor buys shares utilizing the voluntary accumulation plan and later on sells all the shares together, the investor can make more money. It is a convenient investment strategy for gradually building the investor’s position.
The shareholders of a mutual fund may or may not choose a voluntary accumulation plan. However, a minimum dollar amount may be set by the mutual fund for the extra and regular purchases. Hence, the shareholder may either select to meet the requirement or decide against purchasing the plan.
Summary
- Several mutual funds offer voluntary accumulation plans to investors, which allows them to acquire positions over a time period.
- A voluntary accumulation plan is convenient for investors with less experience in trading and with little cash available. It enables investors to benefit from dollar-cost averaging, assuming that the share price of the mutual fund will always rise.
- Due to market price fluctuations of mutual fund shares, shareholders investing in a voluntary accumulation plan pay less, on average, than the average price per share.
Benefits of a Voluntary Accumulation Plan
- The voluntary accumulation plan is suitable for investors who are new to the trading market and with limited cash to invest. The plan provides them time for developing their investments. Also, the investors are not charged a penalty in case they miss a planned purchase.
- A voluntary accumulation plan is spread out over a certain time period, and the investment is a predetermined fixed amount of money. The investors thus receive the benefits of cost averaging.
- Under the voluntary accumulation plan, the mutual fund shareholders are investing a fixed amount of money regularly. Hence, they need not look at the market conditions before buying. With almost no analysis, investors investing in voluntary accumulation plans will obtain a large share in the mutual fund without overpaying.
Drawbacks of a Voluntary Accumulation Plan
- If an investor holds a large amount of cash, then dividing the total investment amount over periodic purchases in the mutual fund implies that the investor will hold the money for a long time. It may result in the cash losing its value to inflation.
- A voluntary accumulation plan enables investors to benefit from dollar-cost averaging; however, it does not guarantee a profit. The share of a mutual fund can continue to fall until the price reaches zero.
- Investors opting for the voluntary accumulation plan normally need to invest for a longer period before they can earn profits through the effect of dollar-cost averaging. Hence, the strategy is not meant for investors looking for quick returns on investments.
Dollar-Cost Averaging
Dollar-cost averaging is a very popular method for accumulating shares of a mutual fund. The investor purchases the shares at regular intervals through fixed investment dollar amounts.
As per a voluntary accumulation plan, the investors may choose to invest a predetermined amount into the mutual fund. When the market price of the mutual fund is high, the investment completed by the investor will buy a smaller number of shares and will buy more shares when the market price of the mutual fund is low.
Hence, due to the fluctuation of the share price of the mutual fund, the average cost per share for the investor will be significantly less than the average price per share. It allows the investor to make money when he/she liquidates the shares. The strategy reduces the overall effect of the volatility of the market on the price of the mutual fund shares.
The dollar-cost averaging investment strategy does not require a detailed analysis of market conditions to find out the best time to make the purchases. The purchases happen consistently regardless of the price of the asset. The strategy, however, assumes that the price of the asset will rise eventually.
Additional Resources
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