Wealth Creation is the long-term process of Systematic Investment in a Disciplined Manner.
Today, most of the Indians are busy depositing their money in the bank account(s), after the Prime Minister Narendra Modi has abolished the transaction in the denomination of Rs. 500 & Rs. 1000 old currency notes on 8th Nov. 2016. A historic event which has raised a lot of discussion on the several podiums of the news media, on how to tackle this turbulent situation of liquidity.
Many experts have started suggesting to invest in the mutual fund via SIP while staying away from the debt products so that the investors can enjoy both the benefits of Rupee-Cost Averaging and market turbulence in the long-run. Some stock brokerage houses have come up with an idea of SEP or the SIP in Equity to give investors the platform of being an own fund manager along with giving them the option to select stocks of their own choice with benefits of averaging.
Rupee Cost Averaging
As per one of the leading brokerage houses of India,
SEP (Systematic Equity Plan) is a new facility which offers investors, to place buy orders for a pre-specified amount or for a pre-specified quantity in scripts of their choice at regular intervals over a period of time as selected by them.
For instance, if an investor opts for a SEP for a period of say 6 months to invest Rs. 5000 per month/ other permitted frequency in shares of B.H.E.L or alternatively, they can choose to buy 20 shares of B.H.E.L every month/ other permitted frequency through SEP.
After giving adequate details i.e. the scrip, amount/ quantity to be invested, the frequency of investment, and total time period; then the investors can place a request for SEP facility with the help of the application provided by the selected brokerage houses.
Comparison of SEP v/s SIP
To understand it better, let’s compare SEP (Rupee Cost Averaging) with SIP in Mutual Funds and how it works.
Suppose Mr. X has started both SIP in XYZ scheme of mutual fund and SEP in ABC stock of Rs. 5000/month from the 1st day of the month, for say 1st Jan 2016.
Just look at the below table of Mr. X monthly investments.
*Qty is Quantity (es)
From the above table, The SEP has generated up to 2 times more returns than SIP in mutual funds in a year. With the total investment of Rs 60,000 in XYZ scheme of Mutual Fund and the same amount in ABC stock; Mr. X has earned Rs. 13,553.55 more with SEP (As, shown in the Chart).
Further, with regular monthly investment in ABC stock, the average price comes out to Rs. 19.58 as compared to the invested price of Rs. 20. This is the effect of Rupee Cost Averaging by adopting SIP in equity which bought a share at both low and high prices giving the opportunity to average out the actual cost.
Though, both the instrument has generated good Return on Investment (ROI) but the SEP has generated more due to the high Risk-Reward ratio in particular stock.
Reason Behind such good returns in SEP:
- Falling/Rising in the prices of the units/share price. As the particular stock is more volatile than the baskets of stocks, which gives better opportunity in buying more quantity at low prices.
- Risk reward ratio is high in specific stock as compared to the Equity Mutual fund. Due to which the falling in stock prices leads to the acquisition of more quantity and vice versa.
- The Rupee Cost Averaging, approach works more efficiently & effectively in a stock (SEP) in short-term as well as in long-term as compared to the SIP in mutual funds.
Disadvantages of SEP
- Investing in particular stock will cost more as compared to SIP in mutual funds as of brokerage and other charges.
- There is high risk in specific stock as compared to the mutual fund which has the basket of stocks from different sectors.
- The performance of stock depends on the company’s internal performance whereas in mutual funds it depends on the fund manager and his asset allocation strategies.
- If the company didn’t perform well in the future, then the invested capital in SEP will get ruined in the long term. Whereas in SIP in the mutual fund, the chances of losing the entire capital are low due to diversification or investments in different sector stocks.
- Selection of specific stocks is more difficult as compared to mutual funds due to the analysis and the changing market trends.
- Mutual fund schemes are managed by the professionals while the SEP (SIP in equity) is done the by investor itself.
- With SEP investor can invest in only specific stock while with SIP in Mutual Funds, Investor can invest in the basket of stocks which gives him both the benefits of diversification and the edge of several stocks in one basket.
Thus, Rupee Cost Averaging (RCA) in equity can give higher returns to an investor, only if there is high volatility in the stock along with strong fundamentals & good future prospects. SEP is risky for investors who are new to equity investments.
The work suits in the hands of the one skilled to do it. If someone else does it, he’s sure to mess it up.
Hope this article, will help you to understand the concept of RCA, the effect of systematic investment in a disciplined manner and of course the facilities provided by the market service providers.