From dropout to fintech disruptor: Zerodha’s Nikhil Kamath
Nikhil Kamath, co-founder of India’s largest trading platform, told Al Jazeera the stock market is ‘very evidently a bubble’.
Nikhil Kamath, 35, co-founded Zerodha, India’s largest trading platform by volume, with his older brother Nithin in 2010 in the southern Indian city of Bangalore.
While it took Zerodha — the name is a combination of “zero” and “rodha”, the Sanskrit word for barrier — a couple of years to get its first thousand users, today it has 4.5 million active monthly users and is the country’s largest trading platform by volume.
Kamath, who grew up mostly in Bangalore, dropped out of school after class 10 at the age of 16 — uncommon for someone from a middle-class family whose father worked in a state-owned bank and mother taught Carnatic classical music.
Kamath spoke with Al Jazeera’s Megha Bahree about dropping out of school, setting up Zerodha, India’s ongoing stock market run, and True Beacon – his latest venture of managing assets for the ultra-rich.
This interview has been edited for clarity and length.
Megha Bahree: You come from a middle-class family where it’s not the norm to drop out of school. How did that happen?
Nikhil Kamath: I was not very inclined towards studying. Around the 10th grade, I started selling used cell phones. Strangely enough, that business was doing quite well. That kind of evolved into some other tiny businesses. At about 17 I joined a call centre, which was my first full-time job. And I started trading equity on the side. I worked the UK [United Kingdom] shift, which was between 5pm and 1am, so that gave me time in the mornings to trade. That quickly evolved into managing money for some of my friends, colleagues. It was the very, very beginning of asset management. I quit the call centre when I was almost 20 because I had started making a little bit of money trading and I joined hands with my brother Nithin to start auto trading.
MB: Did you get into trading because you had been exposed to it through Nithin?
NK: Partly through him, partly through friends. Trading is a very independent journey: you can’t really copy how another person trades, it’s very individualistic, like what works for me will not work for him. I was a sub-broker with a company and they charged me a brokerage for my clients. They would give me 60 percent and they would keep 40 percent, but it was a very inefficient way of doing things because you pay tax twice and stuff like that. So we decided to start broking with the intention that Nithin will focus on broking, I will focus on trading, which was our primary business, and trading will in a way bootstrap the broking business and grow it. Hence, we don’t even have any investors today.
MB: But why won’t you tap any investors today? You no longer need it?
NK: Yeah, we kinda don’t need it. We don’t really do any advertising or marketing. So there is no cost of acquisition. And that’s what typically startups spend their money on, so our need to raise capital is lower.
MB: What made you think you could succeed?
NK: People back then were charging as much as half a percent of turnover — the amount spent to buy shares — as brokerage. It was not very feasible to remain profitable after paying such a huge portion of your turnover in brokerage for every transaction. So we just did a flat fee of 20 rupees ($0.27) for every transaction, which worked very well. A lot of business came our way because of the big fee differentiation. The growth in the first few years was slow; it was organic. We got a bit of press because we were different. And we were younger. Along the way, we invested more in technology and built products in-house for a better user interface, and all of that aided Zerodha in the next growth trajectory, which has been the last six or seven years.
MB: You said you don’t spend on marketing. So was it all word of mouth?
NK: I think it took a year and a half or two years to get our first thousand clients. Fintech at some level is a business of credibility, and people need to have heard about you before they park their savings with you. By virtue of that, it took a reasonable amount of time before we started truly scaling.
MB: What led to the increase in volume and customers?
NK: The markets have kind of been conducive to stockbrokers and fintech companies across the board. And by virtue of that, we have also benefited. Typically, how retail investors work is if you’re making a profit, you log into your terminal every day, you buy, you sell. But if there is a bear market and you’re down 30 percent on your portfolio, you shut your computer and don’t look at it for the next one year. The psyche is very much like that. Nobody likes coming to terms with loss, but everybody wants to be active and take credit when profits are happening. The underlying cycle in the market has aided everybody more than everything. We’ve maybe cannibalised some of the business of the people who are charging a lot more. And some of the business we’ve gotten is from new people.
MB: What is your average customer profile?
NK: Typically, customers would be 30 years old, about $1,000 in the account, about 84 percent male, about 16 percent female.
MB: You make your money from day traders more than equity investors, so why are you pushing to add on more equity investors?
NK: Over the long term, I think having equity, long-term portfolio kind of clientele will add a lot of solidarity to the platform. These are not people who come and go. These are people who are there forever.
MB: You think that could also feed into your new asset management business, True Beacon?
NK: No, there are no parallels between the two companies. When we started asset management, the question was, should we target everybody? Or if we are earning a fee based on the assets we have, should we just target the top where most of the assets live? So True Beacon is focused on that.
MB: Isn’t it a crowded field?
NK: There are many, yes, but the problem is they’re very inefficient. They charge you maybe two percent to set up a fund for you, which is basically making an introduction to a fund manager, who then charges you two percent a year if you make money or not. Then there’s a lock-in period and you can’t take out your money without a penalty. It’s not very transparent and you don’t know on a daily basis how your funds are doing. With True Beacon, we are trying to eliminate all such inefficiencies. So we said we won’t have any middlemen, we won’t go through the distribution model, you’ll have to seek us out. We don’t have the two percent annual management fee. The two percent doesn’t sound like a lot, but if you compound it over 20 years, it’s like 50 percent of your principal has been paid in just fees. Instead, we charge 10 percent of profits. It makes us very client aligned because if for any reason there is a bear market and for three years the clients don’t make money, neither do we.
On top of that, we’ve made it very transparent. There’s a dashboard where you can log in every day to see what your money is doing. And if you want to withdraw your money, you just have to click a button. These tiny things in isolation are small, but we believe the enhanced level of transparency and cost efficiency will significantly help people in the long run.
MB: So what’s the target audience?
NK: Our typical audience tends to be billionaires essentially, in India and across the world, foreigners coming into India, very savvy investors who have a family office. What we’re also trying to create is this community of aggregated influence. For instance, one of India’s largest cement companies is our client. We can connect them with one of the country’s top bankers who is also our client. They can talk directly if they need anything and these things close faster when you reach right to the top. So we’re building this pool of the most influential people on a network where we manage their money primarily but the idea is to eventually leverage their network and create a platform of aggregated influence.
MB: Why would you do that unless you’re planning to charge for the extra services?
NK: We’ll have to monetise it at some time. The idea is to become like an old-school merchant bank, or a differentiated private bank. We want to formalise this network and put it on a platform, a closed platform, where these guys can interact with each other under the umbrella of True Beacon. It’s like a mutually beneficial society of sorts. We should have some kind of a product to facilitate these connections within the end of the financial year.
MB: Switching gears to retail investors, the markets are at an all-time high. Any predictions on where they are headed? And how long will this run last?
NK: It’s very evidently a bubble. But you know, we’re all victims of mass hysteria at one time in our lives or another, and stock markets work like that. Right now, people are buying because you know, some friend of theirs bought something and made 50 percent and not because they like a certain business. Some of it is crazy. One company I was looking at is trading at 140 times its P/E multiple – the ratio of a company’s share price to its earnings per share. It makes parts for washing machines. Why that business should trade at 140 times makes absolutely no sense to me. What retail doesn’t understand is when you buy a business at 140 P/E, what you’re saying is that the money you put in it today, the company has to make the same amount of money for the next 140 years for you to make your money. And people are actually making that bet, which I think is ridiculous. I think valuations across the board are highly inflated and people should be cautious and really, really diversify, not just amongst different equity classes, but buy some gold, buy some fixed income with no risk.
MB: There’s been a rush of retail investors in the stock market in the past 1.5 years and you’ve seen that on your platform. How did that happen? Is it the lockdown?
NK: If you have entered the market one year ago, and you’ve only seen the market go up, hindsight bias is such that you would expect for that to continue in perpetuity. And you’re probably setting yourself up for disaster. I’ll give you an example. A client of mine applied for the recent IPO [initial public offering] of forging company Rolex Rings, under all the members of his family, like some 10 different people, the maximum quantity that he could. And when I asked him why, he’s like, I like the watch brand. So it’s that kind of euphoria. Very scary.
MB: What is your advice for first-time investors?
NK: Diversify. Stay away from leverage. Be reasonable with your expectations of the market. Most often people lose a lot of money in the market because their expectations are not bound to reality. If you come into the market expecting to make 40-50-60 percent returns, stock markets are probably not the right place for you. If you come into the market to make 10 to 15 percent a year, that is a lot. If you’re able to pull off 15 percent, you double your capital in four and a half years with compounding. Come in with the plan that will allow you to attempt that.
MB: Do you see this sort of rush of investors in the stock markets to continue?
NK: I think this will go on for a while. There are too many sceptics like me in the market out there still. Normally, markets correct when there are no sceptics left and all the short sellers are like, there’s no point being short, let’s just buy and ride the tide. We’re not there yet. But we’re not far from the top.