D-Street Talk podcast | We are still 50% hedged as market tests unchartered territory, says Zerodha Co-founder Nikhil Kamath

A) It looks good. If we look at any of the numbers that have come out from companies this quarter, they all seem to be reporting decent numbers.

I think the larger companies in India or the corporations are doing significantly better, in many cases even better than pre-COVID.

I think the real pain lies at the bottom-end of our economy – i.e. the small and medium-sized companies where there is still significant pain.

But, I guess larger companies determine market caps and the benchmark numbers overall. So that will probably continue to rise.

Q) Budget 2021 was as promised landmark Budget in last 100 years and the Street responded with equal enthusiasm. Sensex and Nifty climbed crucial levels. What is the way ahead?

A) Personally, I don’t think I saw anything which was a landmark kind of a thing in the budget. It was pretty like agnostic to many of the big systemic changes that we require.

I think the intent has been positive. The government is looking to diversify more to get foreign investors into the country in a more significant manner than we have up until now. But, I think the markets are kind of detached from these changes right now.

Good news, bad news, any kind of news markets are reacting positively. That's more a factor of; a) sentiment and b) how much foreign capital has been flowing into the country.

This has made us very prone to significant changes if this foreign inflow tap could go off at some point of time.

This is becoming more global in nature as a market. And it'll be interesting to watch if these foreign inflows continue.

Q) How did your AIF perform in 2020? And, are you planning any new fund launches in 2021?
A) We’re planning to launch a fund which will sit in between debt and equity, aiming to yield about 9 percent kind of returns per year. It is a combination of tax-free bonds and large-cap equity.

This should be out in the next one month or one and a half months. We as a fund does better when there is volatility in the market. So, we've done fairly okay this year. I think when volatility kind of ensues, we will do better.

The response to the structural changes we have made in the fund in terms of being the cheapest investment vehicle for HNIs when they want public market equity exposure has been very well received.

The AUM continues to grow by 15-20% month-on-month, and it is gaining scale very quickly.

Q) How do you think the overall AIF industry going to get impacted by the budget?
A) The AIF industry wants one or two things. I am focusing here on the CAT-3 AIF which are public markets linked, the other two are private.

What we want is pass-through taxation. We are asking to be taxed like a mutual fund is taxed. We as fund houses should not have the responsibility of figuring out how much tax is liable, and what structure the investor comes in.

Right now, that is the case. The fund has to pay the tax at the source, which does not make a lot of sense. It doesn't happen in mutual funds and PMS and CAT-1 and 2 AIFs even that is pass-through taxation.

I think the biggest most sensible thing to do is a structural change that does not even affect the government because they get tax from a different person versus getting the fund house.

Q) The year 2020 was a year when new retail investors joined the party on D-Street which still continues in 2021. Are you seeing a similar trend in 2021 as well?
A) Yeah. It continues to grow. I mean, on every side, every facet of the investment industry, accounts are picking up.

Considering the base is really low in India, I think a lot of effort is still required, both from the government and players in the ecosystem to kind of really push education and get more people to come on to the equity markets.

It is a great liquid asset vehicle, which people should be taking advantage of. But hopefully, that number grows exponentially, and that change starts to happen quickly.

Q) We have seen a V-shaped rally since November post US presidential results. What is your investment strategy – what is the kind of cash level you are sitting, and are you fully hedged?
A) Well, we continue to remain hedged. We are the kind of fund house where capital preservation is the foremost priority. We did not chase the last leg of the rally.

So, we're hedged to about 50% even now, and in terms of net exposure, it would be about 50%. If the markets go up, 1% we make about half a percent. But, we curtail the downside risk significantly by hedging.

At the current point when markets are trading at multiples which we have not witnessed in our own history, I think we feel safer with this kind of a risk profile.

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