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How the rich buy?

If you thought Madoff scandal would serve as a reminder against buying shit financial services you thought wrong. Simply wrong.

Sadly I know some of these ‘event managers’ , wealth managers, brokerage houses…and others who organize such functions. I also know many rich people who attend these functions as well as wannabes who attend them. Recently I have got invited to one which i am not attending – even though it is good fun attend one or two to see how it goes.

For example one person with a net-worth of Rs. 3 crores (Rs. 30 million) who wanted to invest Rs. 50 lakhs in a mutual fund (fund of funds) with a 5 year lock-in, a 4% upfront load, fund selection cost of 0.07% p.a. + amc charges of the fund house! I used to be amazed earlier about such deals. Now I realize that this is how human beings behave. The only thing that i can do is sigh. This is because by the time they ask me, the cheque is already gone.  The event itself was a grand function arranged in a 5 * hotel. He was told that he had been selected for a big Wealth event – his relationship manager had called him 7-8 times to confirm. They were asked to come in formals for a lecture on Wealth management by an expert. At that lecture he was told ‘SIP is a good concept Sir, but that is for the person earning Rs. 25,000 a month – NOT FOR THE RICH like you’. So even though this person was running many SIPs he felt (my assumption) that ‘Yes, maybe I have outgrown – and my friend is still treating me like I am middle class’.

However in this case my ‘friend’ was not allowed to give the cheque without asking me – his wife did the good deed. I just re-engineered the transaction and he recoiled at the total impact of costs. However this happened because he did not part with the cheque at the event itself.

If you are rich (or about to get rich)  and wish to invest your money – a) learn about investing – if your ego does not permit you to learn, understand that you do not understand b) invest in an index fund

Indexing is not the most efficient way of investing – but it protects the downside well. If you had invested Rs. 3000 in 2002 it would be worth Rs. 17000 – not bad is it? You would have paid out some money in fees, but got more than that in dividends – so overall you would still have your 17k. The result would of course been far better if you had done a SIP – thanks to the sharp downturn and recovery of 2008 and 09. Almost all fund houses have an index fund – would be happy to help you select :).

This is much better than fixed deposits or other debt instruments…and by a mile.

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Posted by on May 14, 2010.

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Categories: Regulator, Regulations, Rip off, Sales and Marketing

11 Responses

  1. you wrote – “Almost all fund houses have an index fund – would be happy to help you select”. is this a paid service or a charitable offering? please let me know.
    i have chosen Franklin’s Index (Nifty) Fund after lot of analysis on stability of expense ratio & tracking error. do you approve?

    by Param on May 14, 2010 at 9:24 am

  2. Subra,
    This is really congtradictory to the spirit of index fund. Why you have to offer the help in selecting the index fund. The one with the lowest fees will do. Afterall they all invest in the index so like term plans the difference lies in the cost only. Or you want to say that even with index funds the fund managers want to make his presense felt (It happens only in India) 🙂 Will you qualify an index fund which mirrors its index only by 90%.

    by Pramod on May 14, 2010 at 9:44 am

  3. Param

    I meant it as a joke…showing our dependence on ‘service providers’ for all our needs. Low fees, low tracking error and a big size A U M. However in India size is not getting built. Franklin is a good choice, LIC Mf has reduced its amc charges to 1.5% – thanks to SEBI, IDBI MF is now launching itself as a index fund specialist…watch this space.

    Surely I am confident of continuing to beat the sensex – by a mile – thanks to the index construction. L O L.

    by subra on May 14, 2010 at 9:58 am

  4. Dear Param, Nifty Benchmark ETS may be a better option.



    by Ashal Jauhari on May 14, 2010 at 10:58 am

  5. It seems Nifty Benchmark have lower expense ration but doesn’t allow SIP while FT allows. How do we invest on regular basis in Nifty?

    by Jagbir on May 14, 2010 at 12:47 pm

  6. Pramod, I disagree.
    Choosing an Index fund on cost basis alone is a good option only if the tracking error is very low & the expense ratio is stable (& declining). In Indian context, I have seen funds with lower expense ratio post tracking errors beyond 5% & increasing the expense ratio from 0.75% to 1.25% within few months. Bogle suggests that Index fund (for 500 companies) should have expense ratio < 0.1% & tracking error < 0.1% – of course that needs scale & competence & we are nowhere…

    by Param on May 14, 2010 at 12:52 pm

  7. A pure low cost index fund in India is simply a myth 🙂

    by Puneet Gupta on May 14, 2010 at 2:05 pm

  8. The advantage of Index funds does not the make the case , yet, for India. For one, cost of Index fund is high in India (ETF is less, but you pay brokerage) at appx 1.25 to 1.5%. And most of them dont track the Index properly. HDFC Top 200 is 1.8% is a far better Fund and has continually trounced Index with a BIG margin, long-term. There are few other similar funds, though as spectacular as Top 200. Examples include Franklin Bluechip, Franklin Prima Plus, etc.

    My 2c ? Index funds are not yet ripe for India. Of course, their time will come in future.

    by NPR on May 14, 2010 at 3:07 pm

  9. @ Param,
    You are right friend and i know this fact. Actualy I was being sarcastic. My intent is that first three sentences are the ideal situations and the last one is for the reality that in India Fund houses want to add spice to index fund (BTW and index fund from ICICI is named SPICE 🙂 a plain fund named spice what a joke. there are funds called sensex plus which are index- upto 80% and Fund manager 20%. I dont understand that why do I need a fund manager’s skills for index fund, there are always a world of funds for that but you know ……… no comments. Anyhow there is benchmark Fund house which is very true to index funds with minimum cost and minimum tracking error and they dont offer active managed funds so their bread & butter is index funds.

    by Pramod on May 14, 2010 at 6:45 pm

  10. @Jagbir
    You can use our platform – FundsIndia .com – to do SIP on any ETF, including the Nifty Benchmark. Check us out.

    by Chandra on May 15, 2010 at 12:21 pm

  11. funnily I meet lots of people (completely biased sample of people who have been in the markets since they were in their nappies) who have the correct connections to be able to beat the market. And also I know that MOST READERS of this blog will find Indexing suitable. Most of these people whom I meet are in such comfort zone financially that a few mistakes will not harm them. Clearly many are in super alpha chasing mode because their next 2 generations can live just on the dividends or rental incomes. Relating to all sets of people in an impersonal blog is tough. But surely indexing is over glorified for its simplicity. Ask Parag Parikh. L O L

    by subra on May 16, 2010 at 7:16 pm

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About Subramoney

My name is P V Subramanyam, a Chartered Accountant by qualification and a financial trainer by profession. Writing comes from the reading that I do.   To make money you do not need too many ideas. You need simple ideas and discipline. Hopefully that comes out in the blog. After a 15 year career serving in […]more →