I have said this many times in my videos and tweets...

My aim is to attain my financial goals by taking the least risk, the least effort, and the least time (on investing) so that I can focus on my life (triathlon, books, kids, career, etc.).

Managing Money is Boring. But many people approach investing to either appear smart (picking stocks to get high returns) or to get some excitement in their lives (gambling anyone?!). That's fooling around with your money.

I want the money to be ready when I need it, without me spending crazy hours on investing for decades. But is this possible?

Getting into investing without handing over my money to anyone 

I am a working professional and I want to create generational wealth.

I have always been curious about how money works, so over the last decade, I have been figuring out how to increase my income, invest across asset classes, and create an investment routine that gives me sufficient returns to meet my financial goals.

You see...

I like having control over my finances, I find ‘outsourcing investing’ to someone else really difficult.

I’m sure there are some really amazing fund managers out there, but I believe there IS a way for me to invest my money myself, without spending over 10 hours a week analyzing stocks while getting at-market or above-market returns to meet my financial goals.

I also strongly believe I don’t need to depend on anyone else to achieve financial freedom.  

And so, 

After hundreds of hours of research, studying over 25 books, and countless online articles, I figured out a method to invest my savings routinely myself.

This, by the way, meant...

Not only do I get to achieve my financial goals but I also save so much time, anxiety, and effort of constantly following up with anyone or any particular stocks.

Seek and you shall find

The solution I was looking for had two words...

Index Funds 

There is a reason why Index Funds are touted by famous investors as the easiest way to build wealth.

Here’s what Morgan Housel, the best-selling author of ‘The Psychology of Money’ has to say about his investment strategy in this 55 seconds video.

Warren Buffett famously said...

“When trillions of dollars are managed by Wall Streeters charging high fees, it will usually be the managers who reap outsized profits, not the clients. Both large and small investors should stick with low-cost index funds.”

I wanted to further dig deep into index funds and see if this strategy was what I was looking for...

Now, a fair warning, 

What follows is an analysis and thoughts that are my own. This is not investment advice. Neither is this suitable for everyone. You should do your own research knowing yourself and your financial goals, you need to adopt an approach that works best for you. 

Composition of Index Funds

I’m looking at four index funds in India & USA for this research. Sensex, Nifty 100, S&P 500, and Nasdaq 100. Let’s look at what these indices are made up of…

1. Sensex Index

The S&P BSE SENSEX is India’s most tracked bellwether index. It is designed to measure the performance of the 30 largest, most liquid, and financially sound companies across key sectors of the Indian economy that are listed at BSE Ltd. (source)

List of companies in Sensex: click here

Rebalancing Frequency: June and December

Index Performance

Source: Kunal Desai

2. S&P 500 Index

The S&P 500 is widely regarded as the best single gauge of large-cap U.S. equities. According to our Annual Survey of Assets, an estimated USD 15.6 trillion is indexed or benchmarked to the index, with indexed assets comprising approximately USD 7.1 trillion of this total (as of Dec. 31, 2021). The index includes 500 leading USA companies and covers about 80% of available market capitalization.

List of companies in the S&P 500: Click Here

Rebalancing Frequency: Quarterly in March, June, September, and December

Index Performance

Source: Kunal Desai

3. NIFTY 100 Index

NIFTY 100 is a diversified 100 stock index representing major sectors of the economy. The NIFTY 100 tracks the behavior of a combined portfolio of two indices viz. NIFTY 50 and NIFTY Next 50.

List of companies in NIFTY 100: Click Here

Rebalancing Frequency: June and December

Index Performance

4. Nasdaq 100 Index

The companies in the Nasdaq 100 include 100-plus of the largest domestic and international non-financial companies listed on the Nasdaq Stock Market based on market capitalization.

List of companies in Nasdaq 100: Click Here

Rebalancing Frequency: December

Index Performance

So how much money would you need to achieve your Financial Goals? More importantly, how do you achieve Financial Freedom via index funds?

Different people have different aspirations. 

In my ‘Get Financial Freedom’ workshops, participants have said ₹3 crores to over ₹50 crores as their target portfolio amount to feel they have enough money to achieve their financial goals.

In my case, ₹15 crores in investments seem enough money based on my financial goals. 

What this means is that if I had ₹15 crores worth of assets today, I would not need to work or earn an income. 

If however, my financial goals changed and I suddenly felt like launching a self-funded startup then the ₹15 crores Financial Freedom Fund would need to change too. 

Now we do need to factor inflation into the calculations as it will wipe out wealth. Assuming 7% inflation over the next ten years, ₹15 crores will need to increase to ₹29.5 crores. 

For simplicity, I have assumed ₹15 crores as the target value.

Asset Allocation: How would the ₹15 crores be distributed across asset classes?

Real Estate: I don’t consider the house that I live in as my investment because I use it and don’t plan or intend to sell it in my lifetime. I am not a big believer in real estate investments because they’re clunky and not hassle-free to operate. 

However, 5% of my target net worth could go into real estate investments directly or via REITs. So that’s about ₹75 lacs.

Gold: I believe gold has a place in my portfolio. However, not more than 5% of my target net worth. Instead of physical gold, I believe this will be deployed via Sovereign Gold Bond (SGB). So that’s another ₹75 lacs.

Debt: Due to recent experiences, I want to stay away from debt – giving or taking loans. I may change my approach to this down the line when I am more studied and confident in debt instruments.

Emergency Fund: Extremely important to have about 2 years' worth of expenses invested in an emergency fund that may or may not give decent returns. That’s about ₹25 lacs in a fixed deposit or ultra-short-term debt funds.

Equity investments needed: ₹13.25 Core

Below are the calculations to determine the amount of money needed to invest in index funds each year and the top mutual funds available in India to execute this strategy… 

Taking a target amount of ₹13.5 crore in equities, below I have done calculations using index funds' historical returns to arrive at the amount of money I would need to invest annually and the duration taken to achieve such a goal.

Starting amount: ₹0 crores

Target amount: ₹13.5 crores

Duration: 20 years

1. Sensex Index

Sensex Annual Returns: 13%

The annual Investment Amount Needed to invest in Sensex Index Fund is ₹14.75 lacs.

2. S&P 500 Index

S&P 500 Annual Returns: 8.5%

The annual Investment Amount Needed to invest in S&P 500 Index Fund is ₹25.71 lacs.

3. NIFTY 100 Index

NIFTY 100 Annual Returns: 12.5%

The annual Investment Amount Needed to invest in the NIFTY 100 Index Fund is ₹15.71 lacs.

4. Nasdaq 100 Index

Nasdaq 100 Annual Returns: 10.5%

The annual Investment Amount Needed to invest in the Nasdaq 100 Index Fund is ₹20.15 lacs.

How to Invest: Mutual Funds that Track Index Funds

Let’s look at the mutual funds that track the above index funds and the effect of commissions on our investment timeline and/or amount should we choose to go ahead with one of these mutual funds.

1.  Sensex Index Fund

Mutual Fund: HDFC Index S&P BSE Sensex Direct Plan Growth

Type of Mutual Fund: Direct Plan

Expense Ratio: 0.20%

Exit Load: Nil; 0.25% if redeemed within 3 days.

3 year Annual Returns / Historical Performance: 16.0%

Tax Rate: Returns are taxed at 15%, if you redeem before one year. After 1 year, you are required to pay LTCG tax of 10% on returns of ₹1+ lakh in a financial year.

2. S&P 500 Index Fund

Mutual Fund: Motilal Oswal S&P 500 Index Fund Direct Plan Growth

Type of Mutual Fund: Direct Plan

Expense Ratio: 0.51%

Exit Load: Nil; 1.00% if redeemed within 3 days.

3 year Annual Returns / Historical Performance: 16.8%

Tax Rate: Returns are taxed as per your Income Tax slab, if sold before 3 years. Negligible Tax (20% with indexation benefit) post 3 years.

3. NIFTY 100 Index Fund

Mutual Fund: Axis Nifty 100 Index Fund Direct Plan Growth

Type of Mutual Fund: Direct Plan

Expense Ratio: 0.15%

Exit Load: Nil

3 year Annual Returns / Historical Performance: 16.5%

Tax Rate: Returns are taxed at 15%, if you redeem before one year. After 1 year, you are required to pay LTCG tax of 10% on returns of ₹1+ lakh in a financial year.

4. Nasdaq 100 Index Fund

Mutual Fund: Motilal Oswal Nasdaq 100 FOF Direct Growth

Type of Mutual Fund: Direct Plan

Expense Ratio: 0.10%

Exit Load: Nil

3 year Annual Returns / Historical Performance: 17.1%

Tax Rate: Returns are taxed as per your Income Tax slab, if sold before 3 years. Negligible Tax (20% with indexation benefit) post 3 years.

To Summarize…

For the sake of simplicity, I’m assuming that if money is equally invested across 4 index funds, we will get annual average returns of 11.12%.

To invest ₹21 lacs per year, you need to earn a high income. 

But how much, you ask? No worry, Darshan has an answer for you folks!

Annual Income (or Salary) = ₹60 lacs

Taxes = ₹18 lacs (assuming 30% tax)

Annual expenses = ₹20 lacs (hey, you’re freaking rich!)

Savings/investment in index funds = ₹22 lacs per year

Imagine if you didn’t have to pay taxes to the big brother (govt)! You’d have an additional ₹18 lacs each year to invest to get financial independence in half the time.

Conclusion – When does investing in index funds make sense?

Pros…

Index funds give handsome returns for the minimal effort required. According to the SPIVA report, 82% of active funds have not beaten the index returns over the long term (greater than 10 years).

Investing in index funds makes sense for high-income high-savings individuals. Think tech professionals, or CXOs, or business owners who have high earning potential but don’t have the time or inclination to actively manage their money. Yes, they could outsource their investments to wealth managers but that doesn’t guarantee high returns. Plus, the whole purpose is not to outsource wealth management. Keep it in-house with full control.

Cons…

Index fund investment strategy as the sole investment vehicle needs a high income for 10 to 20 years. That is not easy and/or possible for most people.

Investing in index funds is challenging because it is so simple. It’s all about temperament rather than action-filled drama. Picking individual stocks (for someone who’s not in the investment field) is akin to gambling at the casino. Some stocks do really well while most suck! There’s no showing off to your friends at dinner parties with an index fund strategy. You sound boring because you are boring, but this strategy will get the job done. Reaching the finish line is more important than speed.

TL;DR 

1. You can get into investing without having to sit for over 10 hours every week analyzing stocks to maximize investment returns.

2. Index Funds give handsome returns for minimal effort required and can be enough to help you achieve your financial goals.

Here’s what else I’ve been up to lately

Triathlete Training 🏊🏻‍♂️  🚴🏻‍♂️  🏃🏻‍♂️

I’m hoping to do my first triathlon in 2023. I started working on my fitness in 2019 and have basic fitness today. However, I started re-learning how to swim to master the freestyle technique & doing about 4 sessions a week. From February, I’m looking to add 2 running & cycling sessions a week + football on Sundays. Loads of exercise & protein-heavy food!

Leveling Up My Game 💸

I’m hoping to become a Certified Financial Planner in 2023. I’m studying a few hours every day and just warming up at this point. 12 months and 4 exams to go!

Music 🎵 on Looop

Dark Alleys by Carl Cox is a masterpiece…

I'm Reading This Book 📖

‘Your Money or Your Life’ by Joseph Dominguez and Vicki Robin is considered one of the best books on money.

Hope you enjoyed this newsletter. Please share it with people who you think can learn about money with us. Until next time…

May the odds be ever in your favor.

Darshan Doshi