What is a 'Voluntary Accumulation Plan'

A voluntary accumulation plan is offered by many mutual funds to their shareholders as a way to build a larger position over time, typically by investing a small, fixed dollar amount on a regular schedule to take advantage of dollar-cost averaging (DCA).

Breaking Down 'Voluntary Accumulation Plan'

A voluntary accumulation plan is, as the name would suggest, executed at the discretion of the shareholder, but the mutual fund may set a minimum dollar amount for these additional, regular purchases. In that case, the shareholder either opts to meet the minimum or declines to make the scheduled purchase.

A voluntary accumulation plan is particularly appropriate for inexperienced investors with little cash on hand. They can take time to build their investment and don’t face a penalty for missing a scheduled purchase. What’s more, spreading an investment over time in fixed dollar amounts offers the benefits of dollar-cost averaging, buying more shares when prices are low and fewer shares when prices are high. Investors investing a fixed amount through a voluntary accumulation plan need not wait for the “perfect time to buy.” Over the course of the plan, shares purchased at the “right time” tend to outnumber shares purchased at the “wrong time,” meaning that, with little or no market analysis, an investor should end up with a large position in a mutual fund, for which they did not overpay.

Limitations of a Voluntary Accumulation Plan

Using a voluntary accumulation plan to mitigate the effects of a volatile market through dollar-cost averaging has a lot of appeal, but that doesn’t mean it’s always the best decision. If an investor has a large sum of cash on hand to invest in a mutual fund, it is usually better to invest it all at once than to do it slowly. That’s largely because, using the DCA strategy, the investor can wind up holding cash for an extended period of time, which steadily loses value to inflation. It’s the same reason some investors avoid mutual funds holding too great a cash position. Cash, while necessary in many instances, can creates a drag on returns, particularly during a rising market.

An investor who puts a lump sum into a mutual fund all at once rather than spreading it out through a voluntary accumulation plan does run the risk of buying in just before a dramatic market correction. But, statistically speaking, it’s a better strategy. Voluntary accumulation plans are a convenient and powerful tool for investors building their position paycheck by paycheck. They are not a reason to sit on liquid cash.

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