Don't be like Virat Kohli, be like Rohit Sharma
Investing habits that will make you wealthy faster!
My friends Virat and Rohit have been making a lot of money. They are loaded with cash from advertisements, match fees, awards, etc, and all of it was eating dust in their savings account earning just 3% per annum until they found me and took advice that changed their life. But what did I advise them? Nothing special, I just showed them some numbers.
Assuming average inflation of about 6% each year, ₹100 kept in a savings account becomes ₹103 after one year but the goods now cost ₹106. After seeing the Math, Rohit said, “Ae Lakshya bhai, aise toh ye 23 saal mai paise ki value aadhi ho jayegi”, and he was right. If you divide the net inflation (6% - 3% in this case) rate by 70, you get the number of years it will take to reduce the value of money by half. Then Virat said, “Lakshya bro, we should do something about this. I am making a lot of money from MRF ads, I think we should invest it somewhere” and he was right too.
Let’s say you invest in some asset class (stocks, bonds, FDs, PPF, NPS, mutual funds, gold etc), assuming 6% inflation, it needs to give you at least 8.6% pre-tax return each year (assuming a maximum tax rate of 30% as per income tax slab) so that your money doesn’t lose value. So, if your goal is to preserve your wealth, your portfolio’s pre-tax CAGR should be 8.6 per cent. But what if you want to create wealth?
Then you have to take risks because our beloved Harshad Mehta rightly said, “Risk hai toh Ishq hai”, which means that high risk gives you high returns. Both are extremely busy and cannot create wealth via stocks because you need to give enough time to research about stocks and make huge wealth, so I suggested they start with mutual funds.
Both started investing ₹1,00,000 per month in the same mutual fund and kept investing till they turned 50. Mr. Market was kind to them and gave 15% CAGR and at the end of 20 years, Rohit had a corpus of ~₹12,76,00,00, and Virat had a corpus of ~₹10,76,50,000.
Read this: Why will stocks not make you rich?
But wait a minute, if they had both started investing in the same mutual fund and kept investing the same amount for the same number of years, how come Rohit has ₹2 crores more than Virat? Did he cheat in some way? Did he take some extra advice from me and not tell Virat about it? No, he did not, he, just by chance, invested in the “Direct” version of that mutual fund and Virat’s manager invested in the “Regular” version.
Mutual funds are of two types - Direct and Regular. Whenever you invest in a mutual fund, you get “mutual fund units” and each unit has a price called Nest Asset Value or NAV. Every mutual fund has a “Fund Manager” who takes care of everything; when to buy stocks, when to sell, what stocks to buy, what amount to buy, how long to hold, what sectors to invest in, and many other things that need to be taken care of while managing a fund. For this, they charge a fee called “Expense Ratio” which can be 0.2 - 2% of your net assets depending on the Type of Fund, its Assets Under Management, and the Mutual Fund House.
When you buy a “Direct” mutual fund, you buy these units directly from the mutual fund house, simple, right? But when you invest via a bank, a mutual fund distributor, an agent, or any other third party between you and the fund house, they invest your money in a “Regular” mutual fund. The difference in both cases is the “Expense Ratio”, which is about 1% (sometimes more) higher in the case of Regular funds because that extra goes into the pocket of that middle-man as their commission.
So, Virat’s manager invested in a regular mutual fund and made ₹2 crores worth of commissions in those 20 years but Rohit’s wife manages him, so she did not invest in a regular mutual fund and amassed ₹2 crores more. But how to check whether you are investing in a regular mutual fund or a direct one? Just check the name of the fund you are investing in. See the picture below
The same fund started on the same date but the “Regular” fund has given less returns than the “Direct” one. This is what I was referring to in the article above.
Summary: The idea of this article is to educate you that the extra 1% is worth a lot in the long-term horizon. So, invest some time doing the research yourself and don’t rely on any middlemen who take commissions, you will create a lot more wealth. In my opinion, you should always try investing in “Direct” mutual funds. But if you wish to take advice, it is better to take it from advisors who take a one-time fee because they don’t have any incentive to sell you high-commission mutual funds and won’t affect your portfolio returns negatively.
Thank you for reading till this point!
Nice way to explain the mutual fund types