Tech companies could be brokers of tomorrow, says Zerodha’s Nikhil Kamath

Larger companies with more significant moats might be better placed in times of crisis to tide over the uncertainty, says Nikhil Kamath, co-founder and CIO, True Beacon and Zerodha. In an interview with Ashley Coutinho, he says retail investors typically enter the market ahead of a correction but this time could be different. Edited excerpts:

Retail volumes in the market have shot up in the last few weeks. What do you make of this trend, given the tendency of retail investors to join the party late and get their fingers burnt?

Retail participation has gone up significantly in the last five months; many factors can be attributed to this, outside of the time at hand working from home might have provided. A falling interest rate cycle and stagnating returns on real estate seem to be important factors, which have expedited this change.

Bear in mind with under 6 percent of our population having either direct or indirect access to the stock markets; we have a long way to go to catch up to our peers in the West. Retail typically comes in ahead of a correction, when markets have rallied, we are seeing them enter the markets in a correction this time, this instance could well be an outlier compared to past trends.

The market seems to have run ahead of fundamentals in hopes of an early rebound in the economy. Is a correction imminent?

What we have noticed is that markets are generally forward-looking, and a lot of the adverse effects of the COVID crisis seem to be discounted. Investors are being pragmatic about the crisis and foreseeing a post-pandemic world where people still need industry in all forms. This perception along with excessive liquidity could take the markets higher, we do feel markets have run up a bit and in the very short term hold a slightly bearish outlook.

What is your view on the mid- and small-cap space?

Larger companies with more significant moats might be better placed in times of crisis to tide over the uncertainty. We tend to shy away from investing in smaller companies, governance, compliance is a big priority for us, and with more substantial companies, this is less of a worry.

Zerodha, along with a few other brokers, suffered some losses earlier this year when crude oil prices crashed. What are your learnings, if any, from this episode?

Most brokers who allowed commodity trading lost some money here, Zerodha luckily has a model wherein we have many smaller customers versus a few huge ones. This inherently mitigates risk and makes Zerodha a safer option for investors. Exchanges and brokers across the board have now updated their systems to make sure we are better prepared for this situation in the future.

Given the volatility this year, especially post March, how easy or difficult has it been for traders to make money?

Strategies that follow momentum have worked well as markets have been continuously breaking ranges during the period, a straightforward approach like trading moving average crossovers would have worked well at this point. In times of increased volatility, it becomes even more critical to have a strict risk management system in place. I would recommend retail investors stay away from trading based on SMS tips, or trading in penny stocks. Also, not using too much leverage and maintaining strict stop losses will go a long way in towards building long term wealth.

What is the role of technology in broking today?

With pricing no longer being the most significant determinant as to which broker an investor might pick, technology has become the most notable differentiator today. Brokers of tomorrow will probably be more tech companies who do broking rather than brokers who have an element of tech.

True Beacon One, your offering in the AIF space, has garnered more than Rs 300 crore. Could you share some details and future plans.

True Beacon One is a Cat-III AIF that caters to HNIs and UHNIs, given the minimum regulatory investment of Rs 1 crore. The fund prides itself on being very client-aligned, with zero upfront management fees, no entry or exit loads, and 48-hour liquidity. We only charge a 10 per cent performance fee at the end of the financial year or upon client redemption. This carry is based on the concept of the high watermark to ensure a client is never charged twice for the same gains. True Beacon One is a strategic, hybrid fund that allocates about 65 per cent of capital towards long-term equity (18-22 equities out of the NIFTY50 bucket), and 35 per cent towards long-short derivative strategies. Cat-III AIFs are the only regulated pooled investment vehicles in India that are allowed to short the market. This gives us a strategic advantage over mutual funds or PMS. Since the inception of the fund (September 2019), we’re currently outperforming the NIFTY50 benchmark by about 27 per cent. Also, we’ve just launched a Cat-I FPI domiciled in Mauritius to serve as a gateway for foreign investors that believe in, and want to take advantage of the Indian growth story. In the future, we’re looking at launching a Cat-II AIF and a Cat-III AIF, focusing only on equity.

Zerodha has emerged as a significant investor in early-stage ventures, backing start-ups through Rainmatter. What are your investment plans for this year and are you open to taking up majority stakes?

We typically take minority stakes in companies that are in the fintech space; it’s an industry we understand a little bit and can bring a captive audience to, thus helping both sides. We remain optimistic about this sector considering both the burgeoning middle class in India and the under penetration in our ecosystem overall. We will continue to invest in companies we believe in having long-term potential in this sector.