- Date : 27/09/2020
- Read: 6 mins
Also known as ‘Systematic Equity Plan’, stock SIPs work on the same principle as SIPs do in mutual funds.
Most people know about the Systematic Investment Plan or SIP; it is a stock market methodology that allows investors to invest a fixed amount in a mutual fund scheme as per a predetermined schedule; for example, on a daily, weekly, fortnightly, or monthly basis.
The popularity of SIPs has grown over the past few years, helped in part by the mutual fund industry’s sustained mutual fund sahi hai campaign. In fact, this mode of investment has become particularly popular among new earners and new investors who are not sure how to invest in stock market. SIP allows them to make an entry into the stock market, invest regularly, and set financial goals.
The SIP edge
For new entrants, the primary attraction of SIPs is that mutual funds are managed by professionals at fund houses, while the predetermined investments are transferred by the investor’s banks as per the schedule agreed upon. This spares the investor the headache of physically handling the investment process.
Moreover, the fact that one can begin with a SIP amount of just Rs 500 a month means it does not have to cause a financial strain for the investor. And because it requires one to invest regularly at specific intervals, SIPs also instil financial discipline among new investors.
But what many do not realise is that the SIP method is not designed solely for mutual funds; it is equally suitable for – and applicable to – equities as well. In other words, you can take the SIP route to invest systematically in stocks directly, just as you do with mutual funds.
What is Stock SIP?
The stock SIP, also known as Systematic Equity Plan (SEP), works on the same principle as SIP in mutual funds, whereby some brokerages allow investors to buy the shares within a fixed amount or in pre-determined (fixed) quantities every month.
In other words, under SEP, the investor has the option of basing their investment on either a fixed amount of funds, or on a fixed quantity of shares, at specific intervals. Like SIP in mutual funds, this interval can be daily, weekly, fortnightly, monthly, or quarterly.
Therefore, an investor can buy 10 shares of a particular company after a specified interval (say, a fortnight), or they may fix a certain investment amount (say Rs 10,000) for purchasing shares of a particular company after the specified interval.
One can use a SIP calculator of a brokerage house to calculate the approximate return on investment.
How to get an SEP edge?
- While a SIP calculator will not indicate the exact returns due to a number of factors, it can be justifiably assumed that if investing via SEP is carried out in a disciplined way over the long term, it is likely to generate substantial wealth for the investor.
- There are several other advantages to a stock SIP. Let us look at what they are:
- Remember, equity investments are subject to market risk. However, SEP investments can help to minimise this risk and enhance returns, given that the investments will be made when markets are both high and low.
- SEP can also enable rupee cost averaging, where one invests a fixed amount at regular intervals; this ensures more shares are bought with an investment when prices are low (of course, the number falls when prices are high).
- SEP prevents investors from trying to time the markets, which in itself is a risky proposition.
- SEP brings flexibility to one’s investment pattern as it is based either on quantity or amount.
- SEP also enjoys the advantages of regular SIP in mutual funds: flexibility in terms of period of investment (daily, weekly, etc.), flexibility in terms of starting or stopping the investment, inculcates discipline, does not strain one’s finances, can be aligned to one’s financial goals, and helps in wealth creation.
- Finally, SEP helps an investor to acquire a significant quantity of stocks over the long term, which otherwise could have proved difficult.
What are some of the SEP mistakes?
For new investors, it is advisable to have some basic mutual fund SIPs in place first, and then consider going on to invest in equities if there is surplus in investible funds.
However, not only are mutual fund investors known to sell out during volatile times; many frequently also tend to get out of their mutual fund holdings as they start investing through SEPs. This is an avoidable mistake, as mutual funds strengthen any investment portfolio.
There are other mistakes one can commit with SEPs, some of which are listed below:
- First, just as with mutual funds, investors often find it very difficult to go the distance with SEP, but it would be a mistake to stop midway, as stocks holdings swell over the long term and ensures meaningful returns.
- When starting out with SEP, it makes sense to invest in large-cap companies, given their strong fundamentals. However, it would be a mistake to ignore mid- and small-cap companies because many of them also boast of solid fundamentals.
- Also, it is a mistake to concentrate on just one stock; this can hurt if the share underperforms.
- At the same time, it is a mistake to over-diversify. The right way to invest via SEP is to invest over the long term, with a focus on stock quality rather than quantity.
- This brings us to the next obvious point – it would be mistake to have a short-term investment horizon for SEPs; the returns don’t acquire significant size.
SEP provides an opportunity to aspiring investors who can recognise a company for its good fundamentals but are hesitant about investing in them. Consequently, they may end up frittering away years when they could have been investing.
As indicated earlier, direct investing in equities can be tricky due to the risk of the broad market underperforming; the investor runs the risk of losing capital as well. This makes stock SIPs or the SEP riskier than mutual funds.
This also means it is advisable for first-time investors to begin with mutual fund SIPs before getting into SEP, which is more suited for those who can analyse company reports and understand the dynamics of businesses. If you are looking for a stock broker? Here’s a complete guide for beginners.
Note: If you are a beginner, please consult your financial advisor before taking any financial decisions!
Disclaimer: This article is intended for general information purposes only and should not be construed as insurance or investment or tax or legal advice. You should separately obtain independent advice when making decisions in these areas.