This article aims to customize the bogleheads investing philosophy for Indians, given the unique investing landscape in India.
If are aiming for Financial Independence & Retire Early in India or just getting started with investing, the lessons from Jack Bogle are invaluable.
I am personally a big fan of the bogleheads investing philosophy. It has guided my own investing journey over the years.
The guidelines for investing for early retirement in India are inspired by the same mindset.
There are certain elements of the bogleheads investing that are universal. They can be adopted as-is no matter where you live or invest.
Living within your means, investing early and often is the bedrock of financial wellness.
There are some specific elements however that require an Indianized treatment.
This is due to the various regulations, taxation, and other aspects of investing unique to India.
Bogleheads Investing – With an Indian Twist
The Indian investing and taxation landscape is constantly evolving. The changes are far more dynamic and rapid compared to the more mature markets.
Let us look at the Indian investing landscape and how to adapt bogleheads investing for Indian conditions.
Index Funds Versus ETFs
US investors typically prefer ETFs over index funds due to inherent tax benefits of an ETF.
However, in an Indian context both index funds and index ETFs get the same tax treatment.
Therefore, you are much better off using passive index funds instead of ETFs in India.
An index fund in India bought directly from fund companies has some major advantages vis-à-vis passive investing using ETFs.
You do not need to open a demat account or incur any brokerage charges.
You also do not suffer a spread between buying and selling prices each time you make a purchase.
Buying an index fund in the direct mode is the most efficient way to execute the bogleheads investing model in an Indian context.
Consider Market Depth & Liquidity
India being an emerging market still does not have the market depth of more mature markets.
The liquidity in stocks dips significantly once you go beyond the top 150-200 stocks by market capitalization.
Therefore, there is a greater chance of tracking errors in case your passive fund portfolio holds more than 250 top stocks.
A passive fund that includes smaller stocks is also likely to have a higher expense ratio.
This goes against the bogleheads mantra of keeping your investing costs low.
As a result, it is best to limit your exposure to the top 250 Indian stocks.
This will still allow you to capture more than 90% of the total market capitalization of the Indian public markets.
You do not need to replicate holding 500 odd stocks like the S&P 500.
Fixed Income / Bonds
Compared to the equity markets, the retail fixed income market in India is dominated by bank deposits.
Most options for retail investors get taxed on an accrual basis even if you do not actually take out any income.
This includes bank fixed deposits, small savings schemes and other bonds.
As a result, your post tax returns are lower and offer limited tax planning opportunities.
This is not a very efficient way to build a portfolio. The retail participation in fixed income mutual funds is very low.
Mutual funds offer the opportunity to tax shelter your interest income till redemption.
A mutual fund portfolio will even let you use the total portfolio approach to generate retirement income when the time comes.
This significantly helps the compounding that the bogleheads way of investing calls for.
Limit your fixed income exposure to liquid funds or short-term mutual funds and stick to the growth option mode.
Going beyond that timeframe is best avoided so that your fixed income portfolio can act as the hedge to your equity portfolio.
Do not try to squeeze out any more returns from your fixed income holdings.
The risk is simply not worth it.
Access to International Stocks
The bogleheads approach calls for holding just 3 funds as part of your portfolio.
1 fund to hold local stocks, 1 fund to hold local bonds, and 1 fund to hold international stocks.
This is the classic boglehead 3 fund lazy portfolio.
That is all you need.
In an Indian context finding and holding the first 2 types of these funds is easy.
A Nifty50 fund gives you exposure to the largest domestic stocks. A liquid fund or a short-term fund can give you exposure to local bonds.
The challenge comes in including foreign equity assets in your portfolio. This missing 3rd leg is not easy to address.
Due to restrictions on currency outflows and unfavourable taxation it can be a struggle to build geographic diversity in your portfolio.
There are several ways to get around this issue and get some diversification in your portfolio.
None of these are perfect and you need to pick something that works in your specific situation.
Gold as an asset class can give you some level of diversification.
The returns that you get in gold have a low correlation with local equities and bonds.
As it is a global commodity, it can protect you against any future depreciation of the Indian rupee.
Gold has been a go-to inflation hedge for many generations of Indians.
You too can consider including gold as a portfolio diversifier.
Liberalized Remittance Scheme
You can open an account with a foreign broker and transfer funds using the liberalized remittance scheme.
Thereafter you can purchase index funds / ETFs that trade on overseas exchanges.
Of course, this only makes sense if you have sufficient funds at your disposal.
Otherwise just the bank / brokerage charges can take away a substantial chunk of your funds.
Indian Mutual Funds holding Foreign Assets
Some Indian mutual funds do hold / invest in foreign assets.
However, from time to time due to government restrictions they may not take in fresh funds.
Keep abreast of government regulations and invest in such funds when the opportunity opens.
Stick to Direct Funds
As Jack Bogle famously said – In investing you get what you don’t pay for. Costs Matter.
Avoid using any financial products where the costs get inflated due to intermediary commissions.
All fund companies in India have to compulsory offer direct funds that avoid commissions for any middleman.
As a true boglehead you should always aim to buy products without any embedded commissions.
If you need any financial assistance, then use the services of an independent fee only SEBI registered financial advisor.
Avoid falling into the trap of a financial salesman posing as a financial advisor. Their incentives will not be aligned with yours.
Bogleheads investing for Indians works as well as it does for anyone else. The principles are simple, easy to understand and follow.
Self-discipline and keeping things simple helps.
You can follow the ideas and customize them for Indian conditions.
You can be rest assured that just by doing this you will likely outperform most professional investors over the decades to come.
Dushyant Choudhary is the founder of dushyantnomics, an early retirement blog for professionals. Dushyant retired early from his 9-5 corporate life after a successful international career. He brings his knowledge and experience to his current role where he’s dedicated to helping professionals achieve a fulfilling retirement.