Systematic Equity Plan (SEP) – Stock up direct equities systematically
Systematic Investment Plan (SIP) in mutual funds has grown in popularity at a rapid pace in the last couple of years as investors have realized that taking exposure to equities via mutual funds (especially from the young age) to achieve medium to long-term goals is a necessity now. High consumer inflation clubbed with ever increasing medical and higher education expenses, decreasing fixed securities rates, insecure jobs, increased life expectancy, no pension after retirement for private sector employees has made everyone re-evaluate their investment style. From traditional investment plans to KVP’s to PPF, now retail investors have realized the power of compounding and have started to invest in mutual funds via SIP mode to achieve their medium to long term goals.
Systematic investing is not confined to mutual funds alone. It is also applicable to direct equities as well in the sense that one can also invest systematically in equities by either buying a fixed quantity of a specific company’s stock after a specific interval or set a limit as regards maximum amount for which stocks can be bought after a specific interval. So investment options available through SEP and quantity based or amount based. This specific interval can be Daily, Weekly, Fortnightly, Monthly. For instance, an investor can buy 3 shares of Company ‘X’ every month or can set a limit of say 15,000 per month to buy Company ‘X’ stock after a specific interval. Total SEP period you can choose is from 1 to 24 (in months) in the case of ICICI Direct.
Investing in quality businesses systematically via ‘Systematic Investment Plan’ for the long term with exemplary discipline can generate a lot of wealth for the investors. There are a significant portion of investors who tries to time the market and invest lump-sum in equity markets which may be quite dangerous in case market takes a downward trajectory post the investment or the stock invested was more of an inflated bet devoid of solid fundamentals in a bull market. ‘Systematic Equity Plan’ can be good investment strategy for such investors. In addition, there are also investors who believe investing in equities only and not mutual funds – a systematic investment here in equities also can be a good way to average out investment cost over the long term accumulating a sizable number of shares in the process.
Where ‘Systematic Equity Plan’ scores?
- Average out investment cost over the long term.
- Prevents investors from making an expensive mistake of trying to time the markets.
- Various investment options provided under SEP of quantity or amount based brings in a lot more flexibility.
- Investment intervals of daily, weekly, fortnightly, monthly also add to a wide range of options for an investor to choose from.
- Investors learn the art of disciplined investing in the process.
- By investing systematically, emotions are out of the picture.
- No strain on finances as you can invest specific amount per month just like mutual fund SIP.
- Ability to start investing systematically even with a small amount is a significant advantage in SEP.
- Enables an investor to accumulate a sizable quantity of stocks over a long term which otherwise is not possible.
- Takes emotions out of investing as buying a stock through SEP is on auto-trigger.
- It is very flexible in the sense that you can start and stop SEP online anytime you want.
- Just like mutual funds, investing equities via SEP can also be aligned to one’s goal.
- Identifying a fundamentally good company and investing in that for years is not that complicated if you follow the company fundamentals closely.
- Midway investing in a particular stock via SEP, if you sense that company fundamentals have deteriorated and don’t make a good investment option, you can immediately stop SEP and thus prevent yourself to have committed a lump sum amount in the beginning itself.
- If an investor follows investment discipline through SEP religiously, enormous wealth over the long term can be created without any sweat.
- Charges are less as compared to investing in mutual funds wherein expense ratio varies significantly across funds.
- Many investors are aware of good fundamental companies to invest in but are hesitant about the time when they should invest. As a result, they waste years and years thinking on the sidelines. SEP’s works best for them.
- The real advantage of the market downturn in events such as Brexit, Demonetization can be realized through SEP’s.
Mistakes to avoid with SEP’s?
- Selling out mutual fund portfolio to start investing in equities through SEP’s – Please avoid that mistake. Don’t redeem your mutual fund portfolio just because you have now a medium to invest systematically in direct equities via SEP’s. Mutual funds make up a solid foundation of any investor portfolio.
- Including too many stocks under SEP’s – Don’t over-diversify. Since you are investing for the long term, make sure you have a compact portfolio of SEP’s running and focus on the quality of stock rather than quantity.
- Stopping SEP’s midway – Just like mutual funds, SEP’s seem to be very simple and straightforward but very difficult for investors to stick to over a long term. Stopping SEP after 3rd or 4th iteration is a common phenomenon. Avoid that. Go the full distance. Do remember, 10x- 11x returns is great but to make meaningful returns you should have a considerable stocks holdings too.
- Start investing in mid and small-cap companies through SEP’s – Though investment in financial instruments should be as per one’s risk taking capability, starting investing in large cap companies via SEP with a well-established franchise, solid fundamentals and proven track record with impeccable management will be a sensible thing to do.
- Investing in Nift50/Sensex companies blindly – Even though you as an investor prefer investing in Nifty 50 company for equity SIP, make sure you keep a track of its growth trajectory going forward. Companies keep on changing in Nifty 50/Sensex. So investing in Nifty 50 companies blindly won’t be a smart thing to do. There are companies which were part of Nifty 50 but don’t exist today.
- For a short-term investment horizon, equity SEP’s should be at best avoided.
Is SEP for you?
Investors must remember that SIP is a methodology to invest systematically. A simple strategy to invest in quality business via SEP for the long term can be really beneficial to the investors. As retail investors become much more mature about approaching their investments systematically, systematic equity plans are also slowing gaining traction among investors. There are so many beautiful consistent growth stories available in Indian equities. where investment via equity SEP makes complete sense. SEP is an excellent tool for investors whose investment strategy includes buying thousands of shares of a particular script in one go and then the end result is nothing but a huge loss.
There are so many beautiful consistent growth stories available in Indian equities wherein investment via equity SEP makes complete sense. SEP is an also excellent tool for investors who casually buy thousands of shares of a particular script in one go when the market is at an all-time high and more often than not suffers a huge loss. Such a style of investment is very much prevalent among retail investors. Bulk buying of a script should be utmost avoided.
Investors should take a call as to invest through SEP’s or not (in line with their overall financial portfolio composition, risk profile, the timeline to achieve their goal). Investors who don’t understand the nitty-gritty of investing in direct equities should strictly stay away from any direct equity investments and should religiously stick to mutual funds as an investment avenue.
So is SEP’s for you? Do share your views in the comments section below. Share your experiences in case you are already investing through SEP’s. Remember buying 1 share per month may sound boring but what wealth such a strategy would have created if an investor would have invested in a quality business through SEP.
Remember even buying a single share per month may sound boring but such a strategy has potential to create enormous wealth without having any strain on your monthly expenses. Such a strategy is similar to starting a SIP in mutual funds with the amount as low as Rs. 500.
Disclaimer: The author has no investments through SEP’s. Please consult your financial advisor before taking any investment decision. The write-up is for information purpose only and is not a recommendation of any sort to the readers. Mutual funds are subject to market risks. Please consult your financial advisor before taking any financial decisions.