Around 10 years ago, avid reader and chess enthusiast Nikhil Kamath set up an online brokerage firm with his elder brother in Bengaluru. Many people thought the idea was crazy, but young Indian investors fell in love with the platform. Last year, the brokerage firm was on the cusp of becoming a unicorn—a rare one which had been bootstrapped. But the brothers were not content to enjoy the success of setting up India’s largest brokerage firm (Zerodha, which they claim handles more than 15% of the country’s overall equity turnover). They decided to venture into new territory: wealth management. A year later, wealth management firm True Beacon says it has consistently outperformed the benchmark Nifty 50 with True Beacon One, a SEBI-registered Category-III alternative investment fund (AIF). It has assets under management of ₹300 crore.

Thirty-four-year-old Kamath, co-founder and chief investment officer of True Beacon and Zerodha, tells Fortune India why the brothers ventured into wealth management, the emerging trends in investment, and what one should look for in a wealth manager, among other things, in an interview. Edited excerpts:

What led you to enter a new segment?

In my experience, I noticed that the Indian wealth management industry is plagued with several inefficiencies. A large majority of fund managers barely generate market-beating returns, and this is exacerbated by traditional fee models that tend to eat heavily into profits. To change the status quo, my brother and I founded True Beacon; a client-aligned, high-performing, liquid hedge fund that eliminates upfront management fees and entry/exit loads. Our investors are charged a performance fee on profits at the end of the financial year, based on the high watermark, to ensure we make money only when our investors do and to ensure investors are not charged twice for the same returns.

Was there the pressure to succeed when you launched True Beacon?

We do not have revenue pressures; this company is meant to disrupt the status quo, and we will personally back it up until it gets to that point. The intention from the very beginning has been to make the asset management industry more efficient, and we will strive towards that goal.

How has True Beacon One consistently beaten the Nifty 50? Would you be able to sustain your performance in so volatile a market?

True Beacon One is a Cat-III AIF that employs a hybrid strategy. On average, we allocate about 65% of capital towards long-only, large-cap equity, and 35% towards long-short, derivative strategy. The 35% serves two primary purposes: one is to hedge the long-only portfolio; and the second is to generate alpha over shorter market cycles. Cat-III AIFs are the only pooled investment vehicles in India that are legally permitted to short the market, and this gives us an advantage over structures like PMS [portfolio management services] or mutual funds that rely purely on equity to generate gains. We dynamically adjust the portfolio allocation according to market conditions, allowing us to capitalise on volatility in the markets. In March and April, when the Covid-19-induced volatility triggered a massive crash in the equity markets, we were able to cushion a significant portion of that blow by allocating more capital towards the long-short component and betting on the market falling.

The pandemic has changed the way we live and do business. Do you notice a change in consumer behaviour?

There is a fair amount of uncertainty in the ecosystem right now, and investors across the board are looking at open-ended liquid asset classes with a hedging component that could take advantage of volatility over the short term. Cat-III AIFs in India are the only product which has the structure that could do this.

As a wealth management firm, how do you deal with an unprecedented crisis like the pandemic?

True Beacon is a more conservative fund, and we place capital preservation on the top of our list of priorities. At the peak of the crisis, we allocated more capital towards our long-short component to hedge our long-only holdings. This worked in our favour as we were able to both hedge the crash and generate significant returns by capitalising on the downward momentum.

When you look at the post-Covid-19 Indian economy, are you hopeful of a recovery?

Stock prices have seen a massive rebound in the past couple of months. Underlying businesses, though, might take much longer to see a complete recovery. We expect the malaise to continue well into the next financial year.

What are the emerging trends in investment?

Diversification is the new key. We see a significant rebalance from real estate onto more liquid asset classes, with a higher allocation to fixed income, equity, and commodities.

What are the sectors you are focussing on?

We are overweight on IT, Pharma, and BFSI at the current juncture.

True Beacon is around a year old. How has the journey been and what lies ahead? How do you differentiate yourself from your peers?

It has been an incredible journey so far. We set out to change the way HNI and UHNI investors manage their wealth, and I definitely think we are on the right track. We have got a great set of investors onboard, and we are grateful that they trust us with their capital and that we have been able to deliver (and overdeliver!) effectively in terms of performance. We are looking at launching a couple of new funds, including funds focussed purely on equity.

The key differentiators, I would say, are our fee model, liquidity, and execution-related efficiencies. Zero statutory management fees, zero entry/exit loads and a super-efficient execution platform are factors that make us more client-aligned, and more lucrative to investors that are now becoming increasingly aware of how inefficient traditional wealth management models can be.

You recently launched an FPI Fund. What was the idea behind that?

We launched True Beacon International, an FPI domiciled in Mauritius, to serve as a gateway for foreign investors to enter the Indian markets and capitalise on the country’s growth potential, and allow global investors access to the opportunities we provide our domestic clientele.

What is the typical profile of a client?

The clientele for the True Beacon is focused on the UHNI space, with most investors coming in with a ticket size of a $1 million and above. We have an interesting mix of entrepreneurs, promoters, established businessmen (to name a few) amongst our clients. Most of our investors are relatively market-savvy and are looking to diversify their existing investment portfolios.

What are the attributes UHNIs should look for to pick the right wealth manager?

An established track record, investment strategy and philosophy, and net costs should be of utmost priority.

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