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Nikhil Kamath’s formula to earn stellar returns in stock market: Hedge against big loss, let compounding work

Nikhil Kamath said, “I think an investor does so much better when he doesn’t look at the market from a one year or a two-year perspective.”

Nikhil Kamath’s formula to earn stellar returns in stock market: Hedge against big loss, let compounding work
“I feel like there are too many headwinds and macroeconomic issues which do not warrant the multiple that the markets are getting today,” Nikhil Kamath said.

Can a conservative stock market investing strategy earn better returns than the index over a long term? Well, that is what Nikhil Kamath is attempting to do at his TrueBeacon fund, and that is his advice for investors. Be conservative, use hedging to protect your investments against big losses, and let compounding take care of the investment growth, Nikhil Kamath, Co-Founder of TrueBeacon, and Co-Founder of Zerodha, told FinancialExpress.com in a recent interview. His TrueBeacon fund remains extremely conservative, hedging bets and protecting against downside by allocating only about half of the corpus to the equity markets, with the rest in virtually risk-free debt instruments such as government bonds.

Watch full interview: Nikhil Kamath, Co-Founder, TrueBeacon, Co-Founder, Zerodha

Diversify, don’t allocate everything to equities

Instead of investing 100% of capital in the equity markets, the Zerodha co-founder’s advice to investors is centered around diversification. “People should diversify, a lot of the people who have come into the equity markets seem to have too much allocation to one kind of product alone.” He adds that as interest rates have gone up, an investment corpus should be split between debt, gold and equity, which can act as a great inflation hedge.

Further, short-term investing, especially in this market, will not prove to be beneficial, Nikhil Kamath said. “I think an investor does so much better when he doesn’t look at the market from a one year or a two-year perspective, but more from a 10, 20 or 30 year perspective. So plan in that way not for the very short-term future,” he added, urging young investors to think long term and invest for their future.

Read more: Nithin Kamath tells how retail investors can beat seasoned fund managers and earn more returns in share market

A tip for option traders

Kamath’s key takeaway for option traders who’ve entered the markets in the last few years as a result of the pandemic is to ‘be reasonable’. “If you approach the market trying to make 50% a year, the odds that you’re going to lose money is probably 80%. If you put your money in a bank you get 6-7%. Try to build strategies which give you 12-15%. The power of compounding is incredible; if you can make consistently small amounts of money, before you know it compounding will take that portfolio elsewhere”, he adds.

Given that Nikhil Kamath believes the markets are extremely overvalued, he urges investors to remain bearish and conservative. “I feel like there are too many headwinds and macroeconomic issues which do not warrant the multiple that the markets are getting today but the markets have a mind of their own and many might disagree,” he said.

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First published on: 21-11-2022 at 13:47 IST