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What is a Capital Accumulation Plan (CAP)
What is a Capital Accumulation Plan (CAP)
30 September 2022#Private Banking

What is a Capital Accumulation Plan (CAP)

A PAC, or Capital Accumulation Plan, is an investment method that involves the purchase of one or more financial instruments through the periodic payment of capital.

How does it work?

The objective of the Capital Accumulation Plan is to gradually grow the capital invested by the saver.

The particularity of this Plan is that it is modulated to the needs of the saver: in fact, the latter is free to choose both the frequency with which to make payments, the amount, and the overall duration of the plan, which ranges from a minimum of one year to a maximum of 40; although, in order for it to be convenient, experts recommend setting medium/long-term goals, using it for a minimum of 6/7 years to grow.

The mode of investment through PAC is based on the logic of the Dollar Cost Average model: in fact, the latter consists of regularly investing the same amount of money in equities. The first to use this system was Benjamin Graham, master of fundamental analysis and the inspiration for Warren Buffet. According to Graham, it is necessary to diversify as much as possible to decrease the specific risks of individual stocks.

The major difference between PAC and the Dollar Cost Average is that in the Accumulation Plan you do not invest directly in equities, but in ETFs or otherwise in collective investment schemes.

Pro and Cons

The biggest advantage of the PAC is the control of risk and market volatility, as the average purchase price is normalized over time.

Other advantages are the constancy, the flexibility of the plan itself, and the possibility of investing even very small amounts of money, including those with low financial means.

In addition, the risk that the investor experiences declines emotionally and therefore sells low and buys high is nullified, thanks to a managed, steady investment that is evenly distributed over time.

The Plan, however, also has some disadvantages: the major limitation is that after a certain period of time, the investment of new capital begins to affect the average price very little, exposing the investment more to risk should a prolonged bearish phase occur. Other disadvantages are the high management and underwriting costs, but also the fixed fees that apply on each installment, so that getting out early from the previously stated maturity could prove very inconvenient.

The Accumulation Plan, which one is the best?

There is no one solution that is better than another; it all depends on how much the investor is willing to risk based on his or her financial availability, age, and propensity.

For example, the bond fund is less risky but also has a lower return and is advisable for a short-term PAC, while a balanced fund has both average risk and return, and the stock fund is advisable for a long-term accumulation plan because the risks are higher but the returns are higher.