D-Street Talk podcast | Nikhil Kamath of Zerodha says new investors moving away from MFs due to poor returns

I think the reason for that is the decline in interest rates. Liquid funds are no longer giving the kind of return they used to once and all of this money now seems to be coming into the equity markets.

It is now coming directly by investors researching on his own and allocating capital versus going to a fund manager.

There are some positives as well as negatives. On the negative side, I would say that investors on a retail level react a lot more quickly than a fund manager.

So, if there is a 3 percent fall, we might see a lot of people selling at the same time versus if the money came into the markets through a fund house wherein the fund manager might have more restraint and might take longer to make that call.

On the positive side, I think investors have not made too much money going through the mutual fund route. The asset management industry (AMC) in India is very cost-heavy.

There are a lot of distributors at play. The fund managers charge typically 1.5% to 2%, which is kind of not the most beneficial fee structure for a retail investor to add an allocation to the equity markets.

I think them (retail investors) coming into equity markets directly, removes all the inhibiting costs in a positive way. So it has some pluses and some minuses I would say.

Q) Well, the last six months were a roller coaster ride for investors. What is your call on the markets for the next 6-12 months? Do you think the market will come to terms with the fundamentals?
A) At some point, the market has to come in terms of fundamentals. In the next, 6 to 12 months which is still a long-term outlook for me is very hard to call.

But, definitely in the next month, or say 45 days, there is a lot of optimism which has crept into the market that everything will be fine.

Investors are looking beyond the virus and behaving in a manner wherein the prices are reflecting as if the issue is already over. So, definitely in the next 30 to 45 days, I see a lot of volatility.

One should be careful not to get stuck in between all this. As a retail investor, make sure you don't leverage. Make sure you don't allocate too much capital to small and mid-cap companies.

And, I think the key as always remains to have a diversified portfolio wherein you have a certain allocation to equity but you also have the fixed income component which you enter by virtue of buying, say, G-Secs, or tax-free bonds.

Q) DMart profit nearly vanishes in Q1. The stock now trades at 100 times earnings as compared to Industry PE of 74x (Moneycontrol Data). Do you think that amid COVID times high PE companies trading at premium valuations could come under pressure? And, are there any stocks that are hanging by the thread?
A) DMart, they do have great management. The CEO of the company happens to be a good friend of mine and they probably have one of the best quality management’ in their space. So a premium in some ways would be justified.

They also a real estate play and they're very efficient at running their supply chain and logistics. But on an overall level, I do think the companies which are valued at a PE of you know, anywhere between 60 to 100 are kind of taking for granted a lot of the growth that we think will happen next year or the year after.

In such uncertain times, I do not personally allocate capital to companies that are that expensive. An investor would be well advised to maintain caution and be wary when he is allocating the money to companies that are very, very highly-priced, especially in the current scenario.

Q) Lot of bets are being placed on Agri space which remains fairly unaffected by COVID. Where are the pockets of opportunities where investors can look at?
A) Agritech is a big space, I think not just in India, but across the world. A lot of money is coming into the sector, especially when supply chains are getting disrupted across the world.

I would say not just investor capital but government capital will find its money into the sector as well -- as companies become less reliant on supply chains originating from other geographies outside of our sovereign territories.

A lot more money will come into the sector for sure.

How to play space is a bit hard because there aren't very many large listed players in this category. So, people will have to wait and watch what transpires if we have the few companies that are listed and I think most of the innovation typically in India, it's a bad thing.

Most innovative companies in the last 5 to 10 years have chosen to go the private equity route versus coming into the stock market for capital.

As and when more of these innovative companies come into the secondary markets or the stock markets and retail investors can buy a pie of these, I think agri companies will be the flavor of some season. It might not necessarily be this season but maybe the proceeding next season.

Q) Sundar Pichai says Google will invest Rs 75,000 crore in India over the next 5-7 years. He said the investment will be done through a mix of equity investments, partnerships, and operational infrastructure in ecosystem investments. Do you think this would lift market sentiment?
A) It would. I mean more money coming into India is always good news, and I think for all of us, be it a stockbroker or a media house or anybody else involved in the entire ecosystem.

A lot of the time when foreign players make claims of investing significant corpus of capital into India, we don't see them generally follow through with it to the extent that they first committed.

I hope and pray that this time is different, and Google ends up bringing all of this money into India. I think we're a really large market with many, many opportunities.

We have a growing middle class and plenty of room for disruption. And I think this is net-net beneficial for the entire ecosystem.

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