What Is a Value Added Monthly Index (VAMI)?
Let me explain what a value added monthly index, or VAMI, really is. It's a tool that tracks the monthly performance of a hypothetical $1,000 investment, assuming you reinvest everything, over a set period.
Key Takeaways
- A value added monthly index (VAMI) shows what the monthly returns would have been over time on a proposed $1,000 investment.
- VAMI is one of the most commonly used metrics to depict a fund's overall performance to investors.
- VAMI is calculated using net monthly returns starting with a $1,000 at time zero.
Understanding a Value Added Monthly Index (VAMI)
You need to understand that a value added monthly index charts the total return you gain as an investor over a specified period. It includes capital gains and reinvestment of any disbursements, like dividends and additional interest from compounding. Remember, a key aspect is that it's calculated using NET monthly returns, meaning any applicable fees—management, incentive, brokerage—have already been deducted, leaving you with the real return.
This is one of the most commonly used metrics to show a fund's overall performance to investors. VAMI's popularity comes from how descriptive it is; it directly shows you how $1,000 has performed over a given period, and it's straightforward to grasp.
You can use a value added monthly index for various purposes. It provides insight into the growth of your invested capital over time. Sometimes, it helps evaluate a fund manager's performance. It's also useful for comparing multiple funds and index benchmarks. VAMI gets calculated by multiplying the previous month's VAMI by the current month's NET return.
The first point of VAMI is 1,000 multiplied by (1 + current month's NET return). Subsequent VAMI is the previous VAMI times (1 + current month's NET return).
Using VAMI for Comparison
VAMI charts are a reliable way for you to compare the growth of various funds and benchmarks across the market. You can customize these charts to select from options in a fund company’s family of funds. These charts give you a perspective on how an investment has performed over time and might offer insight into potential future expectations.
VAMI charts also provide a visual representation of how similar funds, or funds from different asset class categories, have performed over a specified time frame, including benchmark returns for broader analysis.
VAMI Tools
Numerous market platforms offer VAMI tools for your analysis. These tools allow varying inputs, such as higher initial capital values and different durations.
You can construct a value added monthly index using technical software programming. It typically starts with a hypothetical investment of $1,000, but initial levels can vary. When using this modeling technique, ensure the availability and quality of data to provide relevant charting, as estimated outcomes can be skewed by poor data. You can build VAMI charts in Microsoft Excel or other technical software programs. Online versions are often provided by financial services companies to give a graphical representation of investment values over time.
Morningstar provides an example with its VAMI tool, part of its research offering for mutual funds. Under the chart tab, you get the hypothetical growth of an initial $10,000 investment. For instance, researching the Vanguard 500 Index Fund for the one-year period from Jan. 26, 2017, to Jan. 26, 2018, the VAMI chart shows that your $10,000 investment would have increased to more than $12,500.
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