My Council of Wealth Intellects.

Talking about money with friends and family is essential. Having a group of people you can discuss money with gives you new insight and helps you look beyond the tunnel vision when it comes to managing money. You unstuck your thinking when you get a group of friends or family members willing to speak about money and investing.

I’m part of many such groups but my favorite is the one with a few of my childhood friends. We’re just 5 friends coming from different careers and geographies to discuss all things investing. We’re like a perfect quintet, except we don’t often harmonize, especially in our views, no niceties, no sugar-coating stuff, just brutally honest points of view about stocks, asset classes, and pun-filled crypto talks.

Now, most of the time none of us are in agreement but like my friend Rohan says, “We argue to progress”.

More importantly, none of us seem to take different points of view personally. It’s a good space to be in.

A few months ago, I was ranting about fund managers charging massive fees and financial advisors not advising a ‘direct’ plan for mutual funds to their clients. When I spoke about mutual funds investing in index funds (yeah, I’m your index fund guy 😄), my friend Bosco asked, “Why not just create our own index of stocks and invest directly?”. Bosco is one of the most passionate guys on investing that I know who should be operating in the investment field.

But is that a reason enough to create your own index fund? 

Let’s look at the 2 core problems with the current index fund and what is it costing you.

Problem # 1: Mutual fund expense ratio is eating your returns.

The problem in investing in mutual funds focused on indexes such as Nifty 100 or Sensex or S&P 500 or Nasdaq 100 is the expense ratio. Now, before you shoot the often-heard dialogue “But expense ratio is really low, it’s negligible”, hear me out. Let’s run through some numbers for a low-cost mutual fund investing in the Nifty 100 in India.

Index fund: Axis Nifty 100 Index Fund

Type: Direct Plan, Expense Ratio: 0.15%

Type: Regular Plan, Expense Ratio: 1.0%

The same fund with a “regular” plan (not direct) has a higher expense ratio of 1%. Everything inside is just the same. Same companies. Same fund manager. Same everything.

Now let’s say you invest ₹10,000 per month for a 20-year period. You can look at my previous newsletter to learn why I strongly believe in investing in index funds over a long duration.

Total Investment Amount = ₹24,00,000

Expected Annual Returns = 15%

Total Maturity Amount with 0% expense ratio = ₹1,41,37,214

Total Maturity Amount with 1% expense ratio = ₹1,22,18,173

Total Maturity Amount with 0.15% expense ratio = ₹1,38,30,389

The difference in the final amount that you get at the end of 20 years between a ‘regular’ and ‘direct’ plan is ₹16 Lacs. This is the money you are paying to your financial advisor because you didn’t do your due diligence by spending a few hours (or a few mins reading this newsletter).

Few quick observations:

👉️ If you do invest regularly for 20 years, you still make a fortune. You will be rich with over ₹1 crore in investments. Simple but not easy.

👉️ There’s not much difference between a direct plan (0.15% expense ratio) and DIY investing (0% expense ratio) where you invest yourself. It’s about paying around ₹3 lacs over 20 years vs. spending at least 2 hours a month for 20 years to save this amount.

A regular plan, therefore, makes no sense.

Problem # 2: Index fund doesn’t differentiate between good vs. bad companies

This is a juxtaposition – on one hand, I like index funds because it removes human bias by selecting companies using clear criteria. On the other hand, that very criteria are not able to weed out potential bad bets. Wouldn’t it be nice to fine-tune the index fund by filtering a few companies (like Adani or Interglobe)? I know I’d like that. But that’s not possible given the way the current mutual funds investing in index funds are structured.

So herein lies another problem (and thus an opportunity) to create your own index of companies from the skeleton of an index fund already in existence. Select the majority of stocks from the indexes and eliminate a few companies you don’t like based on your elimination criteria.

Few things to keep in mind.

Market Cap vs. Equal Weight Funds

Most index funds are market cap weighted, not equal weighted. It simply means that HDFC and RIL may form as much as 15-20% of the index fund as against 2% each in the equal-weighted fund. The expense ratio of equal-weight funds is typically higher (or twice) than that of market-cap weighted funds. While I couldn’t find enough data to prove that one method performs than the other, I’m inclining toward equal weight for the long duration. Maybe I’ll dig into this topic sometime in the future.

Total Returns Index (TRI) – The Kicker

TRI Funds essentially give real returns by including the dividends that are reinvested to get us a better effect of compounding over a 20-year period. The opposite is Price Return Index (PRI). As a thumb rule, you get 1.5% higher annual returns if you use TRI over PRI.

What is the “Bosco” Method and how does it solve the above problems?

Yeah, I’m going to call this investing method the Bosco Method 😄

Simply put, it is a way to create your own index of stocks that you can invest in directly with a regular cadence. Here's what you need to do…

Step 1: Review all stocks from indexes in India and USA (Sensex, S&P 500, Nifty 100, Nasdaq 100)

Step 2: Use the Process of Elimination to remove stocks that you deem unfit. You’ll need a criterion to eliminate stocks.

Step 3: Use equal weight or market cap weight depending on your preference.

Step 4: Invest the same amount of money in each stock with the same frequency (once a week, once a month, twice a month, etc.) You should have a financial plan in place to know how much money you can invest each month. Else, use a simple method of investing 20% of your monthly income.

Step 5: Monitor and reinvest all dividends received back on the same day.

Step 6: Review each index quarterly and make adjustments to your own index of stocks if necessary.

I’m curious to learn about any cracks in this approach. Do me a favor and drop a comment or reply to this email with feedback.

“But Darshan, this is a lot of work! 😩 ”

Yes, you are right about that.

You can either take control of your money and live with the investment decisions – good or bad.

Or

Hand over your money to a wealth manager and pay them fees and live with the returns – good or bad.

In my next newsletter, I will share My Personal Index of Stocks that I have researched and have conviction in to invest over the long term and yes, you can make a decent amount of wealth if you choose to use it!

I plan to make the next newsletter available for ₹499 but you can get it for Free! all you have to do is..

1. Follow me on LinkedIn

2. Share this newsletter on Linkedin and tag me in the post

3. Remind yourself the end goal is to become financially free!

P.S My goal is to help at least one million Indians master the art of managing money to achieve financial freedom, so I also give one on one consulting service on everything finance, reach out to learn more..

P.P.S Please note that none of this is investment advice. Do your own research and analysis to build your conviction in investments.

Have a request or comment? I’d love to hear from you. Drop a comment or reply to this email.