It’s possible for retail investors to earn higher returns in the share market, beating indices and even seasoned fund managers, thanks to their agility and smaller capital. However, this may pose higher risk as well to the portfolio. Nithin Kamath, Founder and CEO of Zerodha, told FinancialExpress.com in an interview that the retail investors may have an edge over the fund managers of large AMCs themselves.
Unlike fund managers and HNI investors, those trading with smaller capital have the option to change their course of action whenever required; they can enter and exit holdings at will, Nithin Kamath said. Small investors have no obligation to deploy cash immediately and have the freedom to wait to deploy funds – which fund managers don’t. However, Nithin Kamath is quick to add that it’s nearly impossible to time the market correctly and consistently.
Watch full interview with Nithin Kamath, Founder & CEO, Zerodha
Retail investors can sell; fund managers are forced to hold
“If I’m a retail trader and I have one lakh rupees in a stock where I feel the next month is going to be bad, I can exit in like one second,” said Kamath, adding, “So the retail traders have an edge over larger traders and fund managers.” While large investors may have an upper hand with regard to the information they can access, it can be difficult to act upon it with the large capital they manage. “Assume I’m a fund manager and today I’m bearish about the markets, I cannot sell my portfolio. Regulations say that you cannot sell, you can’t be holding more than 15-20% cash, so that means I’m forced to be almost always constantly being long,” said Kamath.
But, could retail investors consistently beat fund managers?
Even so, there is a very small minority of retail investors who could consistently beat markets and fund managers, since it is extremely difficult to time when to enter and exit various stocks on a consistent basis. The few retail investors who could beat fund managers in terms of CAGR are usually active traders, instead of equity investors, according to the Zerodha founder. Intraday or options traders aren’t chained by the same regulations as larger investors; they can book profits in a trade whenever they want and have the opportunity to be more nimble.
Law of diminishing advantage
Additionally, since traders are focused on earning returns only for themselves, they are able to take more risks, giving them higher returns, he added. Overall, their returns could be higher than the index, but it’s very hard to scale their business. The advantages diminish as the capital being traded with goes up, since traders aren’t willing to take the same risks or employ the same strategies since there’s more to lose.