Why Zerodha’s Nithin Kamath does not invest in cryptocurrencies

Zerodha co-founder Nithin Kamath.

This Diwali, Nithin Kamath, India’s 86th richest man and founder of Zerodha shares with us spending and investing tips to follow this new year

Nikhil Kamath and his younger brother Nithin, co-founders of Zerodha- India’s largest equity brokerage house- may be ranked 86^th on the prestigious Forbes list of India’s richest, but Nithin has seen bad days too, in his past. His Achilles heel like many young millennials? A credit card that went wrong.

In a candid chat with Moneycontrol personal finance, Nithin recounts one of his financial regrets in his younger years, as he shares with us a few insights on how to spend, save and invest smart, along with his views on the much-debated investments in cryptocurrency this Diwali. This Diwali, he looks back at his money mismanagement and draws lessons on how to be a smart spender and investor in the new year.

“The first time I got my credit card, I used to work in a call center. I got a credit card for some reason but ended up using it for something else. But once I maxed that card out, it took me almost 3 years to repay that debt, and by that time, I had paid almost 3  times the money that I had borrowed,” says Nithin.

Decide how much you want to spend. And STICK TO IT.

Nithin points out that “there are just too many triggers around you to get you to spend all the time, be it Instagram, Facebook, or any other mobile applications that are constantly pushing you to buy something or the other.”

That is why, once you have ascertained your cash flow or earnings, it's important to rigorously stick to your budget or the amount you have decided to spend on a monthly or weekly basis.

And it is tough, given that you are constantly and aggressively being sold something fancy or what will supposedly elevate your social status (like those latest NIKE sneakers or those trendy haute clothes in your wishlist) to seemingly make your life better. Let's face it, it's extremely hard to resist the temptation!

But stick to your ground rules, because that is the first rule of smart spending!

Do NOT buy anything with depreciating value on credit

“If you borrow to buy something whose value is constantly depreciating, it isn't a smart strategy, because you're paying interest on a depreciating asset. So you're paying more money while the value of the asset is going down.”

If you’re itching to get your hands on the latest iPhone13 Pro Max on a loan / EMI, stop for a moment and look around. You see, it does not add any positive value to your financial repertoire. When it comes to investing in assets that have an appreciating potential, it means not just physical assets like stocks or more, but most importantly, in yourself and improving your skillset. The reason is: you have to pay principal and interest through your iPhone loan tenure, and when you sell your iPhone, perhaps a few years later, you would hardly get Rs 5,000 back.

Nithin Kamath has a better idea. “When you invest in your education and knowledge by undertaking a course or upskilling yourself, you're automatically putting yourself in a position where you can make more money by spending on a course or learning something new.  It's okay to borrow for such things because the hope is that with your skills and whatever you've learned, you can easily make it back in the future, but generally borrowing money to buy depreciating assets based on future cash flows is not a great idea”, he says.

A credit card is like chocolate

For all those who find the temptation of credit cards absolutely irresistible, then abstinence or avoiding it is the best solution, advises Kamath. Nithin says “credit is exactly like chocolate; it's tempting, delicious, and extremely hard to stop small, right?”

Ultimately, you end up bingeing, both on credit and chocolate, which can adversely affect your financial and physical health. Hence, it's best to stay away from the credit card conundrum, if you think you cannot control your urges to spend incessantly. Kamath himself took a credit card post his personal fiasco only after a decade.

“I don't understand crypto as an asset class”

“The first rule in money is, if something seems too good to be true, usually it is too good to be true. If someone claims that they can quickly make money, and this is not just limited to crypto or even stocks, you have to assume that there is a catch somewhere, because there is nothing called easy money.”

Crypto is an extremely risky and unregulated territory, and thus, it is imperative that you undertake any investment in crypto with only a small portion of your personal net worth or capital. Like stocks, the single most important rule here as well is to diversify your risk and not stay concentrated in a single asset class.

Says Kamath, “ Personally, I have zero exposure to crypto. I don't understand crypto as an asset class itself. I didn't understand it when it was $500 for Bitcoin and I didn't understand it when it went beyond 60k dollars..”