Systematic Equity Plan: The Holy Grail of Equity Investment
What is the best approach to Investment Planning for a retail investor?
I will tell you. It is called 'Systematic Equity Plan', also called 'SEP'.
In SEP, you invest small sums of money regularly in select stocks. Come hell or highwater, you keep investing in these stocks, month after month. Since the amount that you invest is the same, you get more stocks when the prices are low and less stocks when the prices are high.
In this way, your stock purchase reflects your normal purchasing habits.
The above point needs a bit of elaboration. As I mentioned in my other post 'Why Mrs.Preethi Malhotra will not make money in stock market' I pointed out that as per the normal purchasing habits, you will buy more of an item when the price is low and less of the item when the price is high. However, when buying equity, if the price is less, you are afraid that the price will fall further and do not buy the stock and when the price is high, you become greedy and expect that the price will go higher and buy more. This approach is recipe for disaster.
SEP brings your stock purchase habit to your normal purchase habits by buying more when price is low and buying less when price is high. In technical terms, it is called 'Rupee Cost Averaging' (In India)
That is the first advantage.
The second advantage is that there are no transaction costs when you buy stocks as against when you buy mutual funds. Mutual Funds charge anywhere from 2.5 to 4 percent per year as 'Maintenance Charges'. And most of the times all the mutual funds invest in the same basket of Stocks. For example, any MF in India has Infy, TCS, Tisco, Reliance, State Bank, HDFC...
So if you invest in these stock using SEP, you are investing like a mutual fund but without paying the associated maintenance charges. That help increase your return on investment.
Third advantage is that you will get Tax Free Dividends year after year.
So why not invest directly in these stocks instead of going the MF route?
The key point is that if you are an equity investor, the list of companies mentioned above are your dream companies. These are the companies that you want to own but are not able to because of the high prices of these shares. That is where SEP comes in. By regularly investing in SEP of your identified companies, you will build a portfolio of substantial number of shares of very good companies over a period of time.
As they say, little drops of stocks make a mighty portfolio
And that is called 'Investing'...
Any companies that I would recommend here? I would go for Sensex stocks. They are the bluest of the Blue Chips.