Advantages of the formula plan

Formula plans offer the following advantages to the investors:

1. The investor obtains basic rules and regulations for purchase and
sale of securities.

2. The rules and regulations laid down by the formula plans are
rigid and they enable the investors to overcome emotions and make
rational decisions.

3. The investors can earn higher income from their portfolio by

adopting formula plans.

4.. A course of action is determined in the light of the objectives of

the investors.

5. The investor is able to control buying and selling of securities.

6. Formula plans are helpful in making decisions on the timing of

investment

Disadvantages of formula plans

1. The formula plans do not help in the selection of security. The
selection of security is based on the fundamental or technical
analysis.
2. Formula plans are highly rigid.

3. The formula plans can be applied for long periods, otherwise the
transaction cost will be high.

4. Formula plans do not help the investors make forecasts of market

movements. Without such forecasts best stocks cannot be
identified.

Formula Plan Rules

The formula plans lay down the following rules for construction of
an optimal portfolio.

1. The formula plans help investors make a decision on the timing of

investment. Securities will be selected on the basis of methodology
related to the economic, industry and company framework.
2. Basically, the formula plans are highly rigid. The investor, while
following the rigid rules of formula plans will experience some
problems of adjustment with changing environmental conditions.

3. The formula plans work fruitfully only for long period of holding
of securities.

4. The formula plans do not obviate the need for making forecast.

5. Each formula plan has its own methodology of working.