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Nikhil Kamath | Zerodha | inflation: Focus on preserving capital in overheated market: Nikhil Kamath

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Nikhil Kamath, CIO of True Beacon and co-founder of Zerodha, is cautious these days as he describes the current market conditions as “overheated” and is more concerned with capital preservation. The soft-spoken trader turned entrepreneur told ETMarkets.com in an interview that there is incredible inflation in India’s private equity market and the “yawning gap” in wealth distribution in the country won’t be solved by taxing capital gains.
Following are the edited excerpts:

We are sitting at all-time highs on the stock market. How are you approaching investments now?
We believe that markets have overheated, with the second wave of the pandemic gradually phasing out, and therefore it is imperative for investors to have adequate checks and balances. We are approaching the market with a considerable amount of caution, coupled with a hedging component north of 50 per cent that is going to assist us in capital preservation for our clients.

Which sector(s) is a screaming buy or sell for you at this moment and why?
With the kind of exuberance on the Street, nothing is definitely in the status quo. In these market conditions, we reckon that it is not easy to bet on a sector and therefore, it is important to focus on individual stocks. Investors should focus on stocks that could have potential tailwinds due to unlocking or consumer sentiment bias. That said, one can also look to play the sectors that have not participated with respect to the rise in the benchmarks.

There has been a lot of debate about the private market and valuations. What is your take on that space?
Private market valuations are incredibly inflated and the most potent reason I can identify is the glut of liquidity in the venture capital and private equity space. Furthermore, in India, the process of going public is cumbersome and private businesses do not want to sign up for the tedious route. Earlier, companies had to go public, in order to raise capital and keep the ship afloat. However, nowadays with a multitude of investors wanting to put their money into private enterprises, these businesses do not find any reason to get listed on the exchanges.

What do you make of the fact that companies such as Zomato, Nykaa and Paytm are considering listing in India instead of New York or London? Do you feel the Indian market has matured enough to appreciate such companies who do not yet have a proven profit record?
The fact that such competent businesses are planning to list in India is good news. Not to ignore, the market regulator is working diligently on easing up the process of listing. The inclusion of these companies into the Indian equity markets will help deepen it and will enable investors, of various styles, to think beyond the obvious options. In my opinion, Indian investors have become more mature. One thing is certain that profitability is something that these businesses will have to focus on, since an investor would want to see profits in the books, eventually.

While you are trying to disrupt the AIF space, one can’t help but feel that the biggest hurdle for such funds is not industry-specific issues of high fees etc. but taxation. Do you think the AIF space deserves more fairness in tax treatment and why?
That is right, the taxation framework for AIFs in India has considerable scope for improvement. I am not sure whether fairness would be the right word to go with, but it is inefficient to a certain extent. The authorities should consider making the taxation pass-through. Not only will this give investors a greater ability to manage funds, but also allow room for them to be innovative and unconventional.

The launch of the GIFT AIF by True Beacon shows a lot of faith in a concept that has failed to take off. What makes you so optimistic and what is your vision for that fund?
The most important benefit for investors of True Beacon Global is the tax-efficient model it enjoys. The investor has zero-tax liability for the derivative gains made, during the course of the financial year. True Beacon Global is the only operational Category-III AIF in GIFT. The vision is nothing different from the other existing funds under the True Beacon umbrella, that is, to generate healthy outperformance for our investors, as compared to Nifty50, by undertaking a lesser amount of risk.

Do you feel the time has come for the regulator to look at short selling from a different lens? The lack of regulatory flexibility on short selling has been an impediment to the growth of the hedge fund space in India, say, compared to the US.
Short selling and its constraints on funds like ours should be evaluated differently for India compared to the US. The biggest difference is that trading activity in stock derivatives on Indian exchanges is a lot higher, with our exchanges being one of the largest derivative venues in the world. That provides an efficient instrument for investors who want to short certain stocks. Short selling will help price discovery, particularly for securities which don’t have derivatives. But regulators need to balance the demand for better price discovery mechanisms with the need to prevent price manipulation particularly for low liquidity stocks.

The global investment set-up is changing, given the rise of a new breed of retail investors who are armed with more information and influenced by peers when making investment decisions. Do you see an inherent vulnerability in this phenomenon?
There is no doubt that we are living in times of information overload. Investors have barraged themselves with all sorts of details and the thing to acknowledge is that in an information overload, chances of acting on the immaterial/incorrect piece of information increases. Therefore, it is a choice for you to make. I understand that it is difficult to remain immune from every kind of information but having said that it is imperative to exercise discretion. Do not act on anything and everything.

The liquidity-driven rise in the global market as well as the Indian market during the pandemic has made the reality of inequality painfully obvious. Do you think taxing some of those capital gains that investors have made mostly due to central banks could help reduce the froth in the market and help in more equal distribution of wealth?
Notwithstanding the yawning gap in wealth distribution in the country, my reckoning is that specific taxation is not the solution to this problem. If the authorities start taxing a group of people due to a Black Swan event, it will leave behind a lot of problems for the system and their stakeholders to cope with. As it is, taxation in India is a complex subject. I think the problem of wealth distribution can only be solved by bringing more people, from the modest strata of the society, into the formal workforce. That will help them in getting independent and at the same time create additional value for the ecosystem

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