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Zerodha's Nikhil Kamath sees overvaluation in markets; True Beacon II exposure hedged via debt

Nikhil Kamath, co-founder, True Beacon and Zerodha, tells Moneycontrol's Kshitij Anand in an interview that there is an overvaluation of the capital markets, and that is why True Beacon continues to be defensive by hedging long positions using derivatives.

August 11, 2021 / 03:45 PM IST
Nikhil Kamath

Nikhil Kamath


Kamath started equity trading at the age of 17. He co-founded Kamath Associates at the age of 19 to manage High Net Worth Individual portfolios in the public market space, before going on to co-found Zerodha with his brother Nithin in 2010.

In August 2019, Kamath co-founded True Beacon to bring his fund management experience to a global group of Ultra High Net Worth strategic investors.

Kamath said True Beacon II gives conservative investors an opportunity to acquire a greater return on their investment than what FDs offer, while also being an equally safe investment.

Edited excerpts:-

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Q) Your True Beacon I, manages assets worth Rs 1,300 crore with over 300 HNIs and UHNIs. How different is True Beacon II, and what prompts you to launch the fund, considering we are trading at record highs?

A) In essence, True Beacon II can be looked at as an alternative for those HNIs and UHNIs who are more conservative in nature. However, given the fact that markets are at an all-time high, True Beacon II opens an appetising avenue for conservative investors to allocate capital to the fund.

Evidently, historical trends suggest that overvalued markets are often followed by periods of volatility, and True Beacon II is adequately poised to protect our clients’ investments by using tax-free bonds and similar assets, if such a thing were to occur soon.

Therefore, presently True Beacon II can be seen as a sturdy safety net for the post record-high period.

Q) The product is aimed as UHNIs and HNIs. What is the kind of fund-raising you see for True Beacon II?

A) In India, currently, the majority of conservative HNIs and UHNIs invest in FDs. Our fund-raising strategy is to position ourselves as a promising alternative to these investors.

True Beacon II gives conservative investors an opportunity to acquire a greater return on their investment than what FDs offer, while also being an equally safe investment.

This is attributed to the strategy of True Beacon II, which has a 55%, 45%, split in equity and debt respectively. The debt side of the fund allows us to better weather the shocks in the market and offer our clients relatively constant high returns, thereby making it extremely attractive to HNIs and UHNIs.

Another thing to consider would be that, generally, FDs tend to give a return rate that is lower than inflation rates, and, therefore, it would be much more beneficial for HNIs and UHNIs to invest in True Beacon II.


Q) How is the AIF (Alternative Investment Fund) industry in India differ from what we have globally? How do the numbers stack up?

A) The biggest thing to keep in mind with AIFs in India is that the industry is still at an infant stage and trying to find its roots. At present, in India, there are a total of 683 registered AIFs that have cumulatively raised about $25.9 billion, whereas globally, AIFs manage around $4 trillion.

Clearly, India only holds a small slice of the cake, and we, at True Beacon, are looking to be a big component in the growth of AIFs India.

Growing the AIF industry is a very realistic goal when you consider that the size of the mutual fund industry in India is $422 billion.

The growing interest of investors in AIFs can redirect capital from mutual funds, allowing AIFs to grow. Furthermore, it is also essential to consider that India has an ever-growing number of HNIs and UHNIs. So the future of this industry looks promising.

Q) The number of funds coming out with new funds only increased in 2021. The pandemic has left investors chasing for new growth avenues and AIFs happen to deliver that, if we consider the outperformance you have shown for True Beacon I?

A) Yeah, that's true. When you look at the market's performance during the pandemic, it has been extremely volatile with record highs coupled with troughs along the way.

The reason why AIFs have performed exceptionally is because they offer a fantastic way for HNIs and UHNIs with liquid capital to invest with relatively lower amounts of risk while giving high constant returns.

Q) What is your call on the markets? For long, you have been cautious on markets and remained 50% hedged. Do you maintain your stance?

A) We have witnessed a significant aberration between the growth in economic activity and capital markets in India.

This infers that there is an overvaluation of the capital markets and that is why True Beacon continues to be defensive by hedging our long positions using derivatives. As a true believer in the India story, we remain bullish on the growth of the country.

Q) What does the data tell you? Are there more individuals or HUFs that are participating in AIFs?

A) Going by True Beacon’s data, about 70 percent of our clients are individuals. Extrapolating this to the AIF industry, one can assume that there are significantly more individuals actively investing in alternative investment vehicles rather than HUFs in India.

Disclaimer: The views and investment tips expressed by experts on Moneycontrol.com are their own and not those of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.

Kshitij Anand is the Editor Markets at Moneycontrol.
first published: Aug 11, 2021 12:16 pm

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