Be thoughtful about your “default thoughts”

Many of us know about growth mindset. The basic idea is that you don’t restrict yourself, or some other person, to what you or that person is capable of doing today. You consciously accept that one can acquire new skills and do new things tomorrow. I had a revelation yesterday about how growth mindset may look in reality.

Recently, I received feedback from my managers that I needed to do a better job at «responsibility». My director said, “If everyone on my team is doing the bare minimum necessary, I can’t take this team to new heights. I want you [and everyone] to go above and beyond the baseline expectation.”

I immediately knew what I had to change. I have to stop thinking “I don’t know how to do this” and replace it with “I can figure this out.” That should be the default thought.

Default thoughts should be empowering, and be of growth mindset, rather than of restricting growth.

“Hard earned” money

Am I the only one irked by the expression “hard earned” money? As if money that one got easily is any less respectable. Money is money irrespective of how one gets it.

Money is fungible

One of my money management goals for 2022 was to reduce stress caused by “overspending”. (Overspending within quotes because I am technically not overspending, but my accounting makes it look like overspending.) I didn’t really make a conscious effort towards this goal, but I have improved quite a bit. The benefit of letting your subconscious mind solve problems, I guess. The primary reason for the improvement is my realisation that money is fungible.

Something is fungible if it can be perfectly replaced by another instance of the same thing. I have 3 ₹10 notes in my wallet: they are fungible. I can give any of those 3 notes when I buy something for ₹10. Which specific note I give out doesn’t hold any significance. Likewise, the money I hold in this account vs that account doesn’t matter. It’s all money that I have, and it’s all money that I can spend when there is a need.

I made a tax estimation mistake earlier in 2021, and that required me to sell some of my debt investments to make the tax difference. For a while, I kept that on my to-do list saying I should repurchase those debt assets to make my portfolio whole again. Over the past few weeks, I have acquired a new understanding that it doesn’t really matter if I do or don’t repurchase those debt assets. I had an unexpected expense; I liquidated some of my assets to meet that expense; end of the story. Thinking that the left pocket has to repay the right pocket is an unnecessary stress.

Focusing on smaller pockets of money and trying to keep every pocket healthy leads to stress. Assessing the health of the entire portfolio is a much simpler task. Since I sold my debt assets to pay the tax, now my asset allocation is skewed towards equity. I just have to sell some equity and bring the portfolio allocation back in shape. That’s all there is to do now.

Not all index investing is passive investing

I used to think passive investing to be synonymous with index investing. Over time, my understanding has changed thanks to articles such as Data Mining in Index Construction: Why Investors need to be cautious.

Factor indices such as “quality” and “value” are not quite passive because the index construction methodology is not much different from what an active fund manager may do. There are factor indices constructed using less subjective factors too, such as equal weight. Since an equal weight index fund will have to constantly buy and sell to keep the constituents at roughly equal weights, the fund is hardly passive.

Okay, factor index funds are not passive. But what about funds like Nifty Next 50? They are market-cap weighted, so there’s no frequent buying and selling. Constituents are also determined by the market rather than arbitrary criteria on “quality”, “growth”, etc. Would that qualify Nifty Next 50 funds as passive? I am no expert, but I think they are still somewhat active because an index like Nifty Next 50 does not track the market. Such an index gives you return and risk that’s not necessarily correlated with the entire market. You are basically tracking an arbitrary subset of the market instead of tracking the entire market.

Index investing in India usually means investing in the Nifty 50 index. Even firm believers of index investing often recommend against investing in a more holistic index due to liquidity issues and elevated impact cost. Nifty 50 is an approximation of the Indian equity market rather than the whole Indian market. Therefore, one can argue that Nifty 50 is also an active choice: you choose to leave out the bottom of the market because you think those companies don’t add much value. A “true” index investor wouldn’t do that.

If you are wondering why I care so much about investing in the whole market, you’ll find the arithmetic of index investing interesting. But don’t get me wrong: I am not arguing that everyone should invest in the entire market. I am only observing that pure index investing may not be practical for most investors. Being pedantic and dogmatic is seldom good; investing is no different.

Active vs Passive

Passive investing is where you minimise activity. Activity includes decision making. The more decisions you make, the more active your investing style is. Choosing to buy and sell frequently? That’s active investing because there’s a lot of trading activity. Investing in a subset of the equity market? That’s active too, because you are actively leaving out a part of the equity market.

Here is my attempt to sort various mutual funds and ETFs on how active or passive they are.

1. On the one extreme, we have active mutual funds, such as Axis Bluechip, Parag Parikh Flexicap, etc. It should be no surprise that I consider these funds the most active.
2. I’d put sectoral funds, such as Tata Digital India after this. While these funds may track every company in an industry similar to an index fund, these funds are for taking concentrated active bets. The investor is actively choosing a sector to invest in.
3. Factor index funds such as Low Volatility Index, Equal Weighted Index, etc. Some of these indices do active stock picking (albeit with a set of predefined rules) while others do frequent buying and selling. Both qualify as active.
4. Index funds that track some “middle of the market”, such as Nifty Next 50, Nifty Midcap 150, etc. Because they are in the middle, the risk and return of these indices likely won’t have much correlation with the whole market.
5. Index funds that track the “top of the market”, such as Nifty 50, S&P 500, etc. While these funds still pick one part of the market and leave out the rest, they often correlate with the risk and return of the whole market.
6. Index funds that track the entire market of a country or a region, such as VTI (which tracks the whole US equity market) or funds that track the MSCI World index.
7. Index funds that include every company in the world, such as VT, are on the other extreme. These are the least active because they represent the entire universe of investible companies and they don’t do frequent buying and selling.

This list isn’t exhaustive. There are options like VWRA that don’t fit in any of the aforementioned categories. VWRA is similar to VT but with limited small cap exposure, so it’s a blend of #7 and #5.

I used to think that all index investing is passive. After looking at all the practical options an investor has, I am convinced that pure index investing is seldom practical. Most index investors would end up choosing an active index, but that’s not necessarily a bad thing.

I also used to think active and passive investing as 2 absolute opposites. But now I know that active and passive are 2 edges of a continuum, and your investment is almost always a blend of active and passive strategies. You fall somewhere in the middle of the spectrum.

My costly taxation mistake

I made a costly mistake in the 2021-22 financial year. I did certain things assuming that a specific tax rule will lower my tax liability. My accountant who is preparing my tax return is telling me that my assumption was wrong. Basically I am looking at a big tax bill this year (along with interest too, since I didn’t account for this while paying advance tax)!

Lesson learnt: do not assume you’re right and cross-check with experts. If you expect to save a lakh rupees in taxes, it’s prudent to spend one or two thousands in validating the assumptions to be doubly sure.

Jupiter Pots: an essential tool for the financially organised

I am an organised person. I like it when things are where they belong. I don’t like it when they are scattered around or piled up as a mess. I recently recalled how I have been getting better at financial discipline. Getting better means better organisation, and better organisation means reduced clutter. Unfortunately, most financial products on the market don’t offer much to reduce clutter.

One of the things I have been focusing on in recent years is to reduce the impact of unplanned or unexpected expenses. I have a residential property which earns rental income. I sell mutual funds fairly regularly, which results in capital gain. I need to pay advance tax for these incomes every 3 months. It’s easy to move some money into a separate account (bank account, mutual fund folio, etc) to meet such upcoming expenses. However the real trouble is keeping track of how much money is in that account for what expenses. It’s very easy to forget why we moved money into this account, which causes this account to become an unorganised pile of cash. We can see how much money is kept aside, but it’s hard to tell if we can take, say ₹5,000 from this account to spend on something.

Jon Eben Field, CC BY 2.0, via Wikimedia Commons

In theory, ICICI’s iWish accounts should fit this bill, and that’s the first thing I tried. But turns out, iWish is way too rigid for my needs. Here’s an example. We buy contact lenses every 3 months, and I wanted to save every month for that. But I couldn’t because iWish has a minimum tenure of 6 months. Often, I just want to keep some money aside without a “goal amount” that I want to save. For example money kept aside for an upcoming repair work or advance income tax payment. iWish does not support simply keeping some money aside either.

This lack of tooling support came up during a conversation with my coworkers. One person suggested that I take a look at Jupiter.money. Jupiter has a feature called Pots that is precisely for people like me. I can create and destroy pots at will; I can keep money aside as long as I give the pot a name (such as “income tax advance” or “floor repair”). No need to define a tenure or specify a goal corpus. The moment rent comes into my bank account, I move some amount to the “advance tax” pot. I have a “contact lens” pot into which I move money every month (and withdraw once every 3 months). At any point in time, I have the clarity of whether I have saved up for a certain expense, and how much.

Jupiter Pots is a good example of how I want my tools to be: simple, flexible, and without arbitrary rules (such as iWish’s 6 months tenure). Give me the basic building blocks and let me compose those blocks in the way I need/want. Tools that pretend to know how they will be used often end up too rigid, similar to iWish. (The flipside is that a tool that lacks a rigid structure is not useful to people who just want readymade solutions. There is room for products like iWish in the market; just that I don’t want those tools in my own tool set.)

Ever since I started using Jupiter Pots, I feel like I have found the missing brick in the castle that I have been building; my safe and organised castle where everything is tidy inside.

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PS: I am not paid by Jupiter to write this post; nor am I affiliated with Jupiter other than as a customer.

HSBC Cashback vs Axis Flipkart credit cards

I am a ‘cashback harvester’. I spend way more energy than I should in maximising the credit card cashback I earn. What follows is minutia around cashback policy of 2 credit cards. If such petty details are not your thing, you’ll be better off skipping this post. 🙂

I hold multiple credit cards and I consciously choose the right card to use for every transaction. The ‘right’ card is the one that gives the maximum cashback, of course. Until a few weeks ago, HSBC Cashback card was my default card, primarily because that was the best among what I had (i.e. this is not an objective judgement or recommendation). Then I got Axis Flipkart card and started using the Axis card for everything because it gives me 1.5% cashback on all spends while the HSBC card only gives 1.5% cashback on online spends. But the first statement for my Axis Flipkart card reminded me of the old saying, ‘the devil is in the details’. Let’s look at how the HSBC Cashback card continues to be the better card in some areas.

• Any spend less than ₹100 will not earn any cashback on the Axis card. The HSBC card doesn’t say anything like it.
• Cashback on the Flipkart card is rounded down to the nearest whole rupee for each transaction. Doing this for each transaction means the aggregate cashback Axis gives is considerably lower than what one might expect looking at the statement total. For example, I spent ₹181 on the card and that has fetched me ₹2 cashback. One would expect to receive ₹181 × 1.5% = ₹2.715, but will have to forego ₹0.715 because of the rounding down.

This means that I should continue to use the HSBC card for:

• all online transactions because there’s no rounding down
• any transaction less than ₹100, be it online or offline

While the HSBC card continues to remain relevant for me, I must also highlight that Axis Bank’s credit card statement makes it very easy to see how much cashback is being earned for each transaction. HSBC doesn’t reveal as much information, so the customer will have to do the math themselves to see if they are getting cashback for every transaction that they think they are getting cashback for.

Compounding of discipline and fitness

Someone I know asked a badminton coach once: “Exercising is boring. How do you keep up the routine to exercise every day?” The coach said, “Yes, it is a bit difficult initially. But once you see your fitness improve as a result of exercising, you feel good. For example, you may not tire as much as before when climbing stairs. Often, that’s enough encouragement to keep going.”

I am experiencing the same thing now, but in financial fitness. For many years, the only “accounting” that I did was reviewing my credit card and bank statements to make sure that there weren’t any surprise charges. Only in 2013—well over a decade after I started making money—I got serious about money management. (The trigger for this came from an unlikely source: Thirukkural!) This is when I started learning about money, investing, etc.

It was a slow start, though. Only in 2019 I decided to write down my expenses as they happened (instead of reviewing once a month). I didn’t have a clear idea of what will come out of this. I was just entering all the expenses into a spreadsheet. Eventually I started making graphs to visualise where my money was going every month. It was all just a futile or fun exercise that didn’t alter my spending choices or money management. I was spending just as before, but now I had a record of where my money was going.

‘Fitness’ by Nick Youngson CC BY-SA 3.0 Pix4free.org

In 2020, I started goal-based investing (thanks to Kuvera!) instead of just putting money in random assets. The combination of expense tracking and structured investing led to another revelation: I must plan for big ticket expenses. Not planning for large expenses was giving me unnecessary financial stress, I realised. More monthly savings and more planning followed.

Until 2 months ago, I couldn’t answer the question “How much is my monthly deficit or surplus”. I could see the list of expenses, but it wasn’t obvious how much I was overspending each month or how much surplus I had left. That led to making one other spreadsheet for monthly budgets. With a budget in place, I now have a good idea of my fiscal discipline at any given time. This is far better than blindly going through the month and meeting expenses as they come up. This budgeting exercise made me realise that I should take some pocket money for myself.

I have a money management system that I keep refining as I go. It keeps getting sophisticated over time! It’s the same thing that the badminton coach said. Once you see some benefits, not only do you continue exercising regularly, you’ll also add more exercising routines, eat better, make changes to improve your sleep, and so on. A good change in one place spills over to neighbouring places and suddenly one day, the change is so massive that it’s overwhelming to a beginner.

If someone had showed to me 10 years ago the same system that I follow today, I would have been overwhelmed and wouldn’t have had the courage to start. Even if I had tried, there’s a good chance I would have failed. The secret is to start small and improve over time. Slow or fast doesn’t matter. Small or big doesn’t matter. But what matters is if you’re doing something that’s sustainable, and if you’re moving in the right direction. Like with compounding, you may not see any change for the first many years. And then, suddenly one day, you’d be witnessing a great change that looks almost unbelievable.

Save family money by taking a monthly allowance for yourself!

Whenever I speak with someone in my family who’s running a business, I tell them to always draw a salary for themselves. I tell them, “Take some money out for yourself every month. If you can’t afford to take ₹10,000 a month, take ₹2,000 a month. But your personal expenses should all come from your own salary. Spending for business needs and personal needs from the same bank account will either lead to excessive spending, and/or confusion about your cash flow.”

As new business owners, they are reluctant to draw a salary for themselves: they feel they should work without a salary until the business is profitable. Taking money out for their personal needs looks selfish to them. But the reality is that they have their own personal expenses, and they often end up spending business capital without realising it.

Image credit: mohamed hassan form PxHere

We always have clarity of thought when we advise others. We conveniently forget or ignore that advice in our own matters. That’s exactly what I was doing too: I was spending family money for my own personal expenses!

I manage money in our household. I take care of cash flow management, saving for recurring expenses (such as insurance premiums, school fees, etc), investing for future needs, and so on. In addition to our main investment portfolio, I also have a “fun portfolio”. The main portfolio is for the family’s needs, so it’s conservative and big in size. The fun portfolio is tiny and has all sorts of random assets that catch my fancy.

Earlier today I was thinking that I should be setting a limit for this fun portfolio. When I was wondering what the limit should be, I realised for the first time that I had been spending family money for my personal expenses (i.e. building this fun portfolio). Oops! I immediately added a certain sum as my allowance to our monthly budget. Whatever personal expense that I have, it must come from that allowance.

Having this arrangement is so liberating. Now I can buy random flashy assets without feeling guilty about splurging family money on random things! It’ll also force me to trim the portfolio by selling some old assets when I want to buy a new asset but I don’t have enough money.

It’s counter-intuitive how taking some money out for my personal expenses ends up saving family money in the long run.

My money management goal for 2022

Ever since I started tracking my expenses in 2019, one thing has been bothering me: I spend more than I earn through regular salary. I am not going broke, though. I have other irregular income too. My total income (salary + irregular) is more than my expenses, so I have some money left over for saving/investing.

This is likely irrational, but I want to spend less than my salary income. Every month I notice that the expenses are more than the salary income, and that stresses me out. As we all know, such a consistent stress is bad for the mind and also bad for the body. And I do notice the impact of this stress.

I don’t know what the solution is. Maybe I can recalibrate the expectations to live within the total income (instead of within the salary income). Maybe I need to come up with a novel way of accounting so that the spending looks healthy. (Reducing expenses is not really an option because I don’t want to downgrade the quality of life.)

I think this is a good money management goal for 2022. What good is money and wealth if you can’t be happy!