Most people overlook this small leak in their investment plan which overtime costs them a big chunk of money💰

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 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).

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.

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

Hop over to my newsletter and read the step-by-step guide along with the full analysis 👇🏻

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Have a request or comment? I’d love to hear from you.

Thanks,

Darshan Doshi