The school dropout who turned the business of managing wealth on its head

The man behind Zerodha has now made a mark catering out to ultra HNIs with a new outfit that takes forward the group's value proposition of transparency

He's just 34 years old and is already leading two of the largest disruptors in stock trading and wealth management spaces. While Zerodha is a broking outfit started about 10 years ago, True Beacon, which caters to a high networth individual and ultra HNI customer base, is a much more recent enterprise, founded in October 2019. And it is already managing assets worth Rs 400 crore or thereabouts.

Yet, it would astound you to know that Nikhil Kamath quit formal education at age 15, when he was in the 9th standard, to take up playing chess professionally. He continued moving pawns, rooks, and castles for another two years before the entrepreneurial bug bit him. Kamath quit chess at the age of 16 because he realised there were better players out there, and in order to make a true mark in the sphere, one would need to be one of the top-10 in the world. That's when he tried out a few tiny businesses--selling mobile phones, offering laundry services, dispensing medicines from his little pharmacy. And failed in all of them. These businesses were during his stint at a call centre, between the ages 17 and 19.  

Were there any takeaways from the businesses he had to shut down? "I learnt that you must not do things you don't understand," he says. A never-say-die attitude led him to take a job at the call centre, where he dabbled in stocks for a bit. That is where he found his true calling. 

"Luckily, something worked, and I soon decided to become a sub-broker," says Kamath. "This in turn led me and my brother Nikhil to start a small enterprise called Kamath Associates, managing money for HNIs." The siblings later acquired a broking licence and renamed the business Zerodha in 2010, when he was all of 24. 

The Zerodha story

"Zerodha is a play on the words 'zero' and 'rodha', which in Sanskrit means no barriers. The idea was to build a broking services product that was a lot more transparent--something that would prove its worth and would automatically attract the customer," Kamath explains. He says Zerodha did not consciously do any marketing or PR campaigns to build its business and most of the footfalls, as he calls it, spawned from word of mouth. His take: while media and PR do play a role in any enterprise, Zerodha's was a business of credibility, a USP that paid off over time.

"We aren't the quintessential broker. We're younger and cooler in a way. Outside of how efficient and transparent the business is, I think the culture is quite good, we don't take ourselves too seriously," he says.

Zerodha is completely self-funded so it does not have to go through the rigmarole of getting every key decision ratified by a board or committee. "Being bootstrapped gives us the leeway to do whatever we want. So, for instance, if we were to take a decision that would bring down the revenue by 50 per cent, we could still go ahead and do it, because we aren't answerable to an investor," Kamath explains. 

But wouldn't spurning external funding have been a constraint in the earlier days, say, for going out in the market to acquire clients? "Our modus operandi was to build a better product and wait for the client to come to us, rather than the other way round. Of course, we did not scale as quickly as we could have, but in hindsight it was a better decision for us to take." 

Kamath says Zerodha started getting attention towards the end of the first year or may be at the start of the second year because of the way the business was structured. "We charged a much lower fee than everybody else in the ecosystem back then--like we were about 95 per cent cheaper. We started to build serious credibility 5-6 years into the business, or about four years ago," he explains, adding that Zerodha's current customer base in about three million active users.

True Beacon

This was an enterprise Kamath and his brother Nithin set up in October 2019, to cater exclusively to high net worth individuals and ultra HNIs. True Beacon takes Zerodha's transparency and cost-efficient business model forward as it tries to disrupt the asset management space. 

"If you go to a private bank or wealth manager, you'd have to pay 1-2 per cent to the middleman or distributor, and another two per cent or thereabouts to the wealth manager a year, regardless of whether or not you make money. And then you have some very opaque terms and conditions. You can't, for instance, take your money out when you want, there are lock-in periods in place, and so on," Kamath explains, adding that this experience that has not changed over the past 20-30 years, both in India and across the world. 

Kamath asserts True Beacon aims to change all of that. "We have removed every inefficiency...we don't have middlemen, we don’t have an annual management fee, and we don't have any set up costs. We charge a flat 10 per cent as carry, so if a client puts in a hundred (rupees), all of it goes into the fund. And if the hundred becomes a 110, we charge one rupee," he says.

Both brothers do everything together. "In terms of putting our neck on the line, I think what differentiates us from the rest is that if for some reason, the markets are in a downtrend for, say, three years, we don't make any profits for our client. True Beacon as a company does not make any revenue in that case. On the other hand, a private bank or wealth manager would continue charging the two per cent management fee," Kamath explains. "While the difference may not amount to much in a year or two, over the long term, it would substantially erode the customer's corpus in case the fund manager isn't able to perform over the long term."

Kamath says True Beacon is currently managing assets worth Rs 400 crore and is scaling up very quickly month-on-month. 

Trading strategy: True Beacon has set itself a target of outperforming the Nifty50 by six per cent. During the past 12 months, it has beat the index by a staggering 36 per cent. "Ours was a play on volatility caused by a series of events, the most prominent being the pandemic. That helped us outperform the market by such a huge margin. But otherwise we are looking at a six per cent top-up over Nifty," says Kamath. He adds that the company has a long book and a short book and takes calls on short-selling some scrips while simultaneously going long on others it thinks will do well in the market. Prioritising capital preservation, he also mentioned that the fund is always hedged to a certain degree.

Rainmatter 

Founded 7-8 years ago, this is a venture capital fund for early stage fintech companies. It also has a fund for companies working on climate change, and "essentially anything that we find intriguing in the start-up world. It is more our way to back people in the community whom we feel might do well in the future". Rain Matter has invested in about 25 companies so far. "One of our better bets is a company that specialises in automating compliance processes like account opening and KYC, allowing online. Another winner is into thematic investments," he says.

In the midst of all the hard work and calculations, Kamath makes sure he takes time out to play football, table tennis, pool, and computer games. And oh yes, he does like 'chilling out' and catching up on some quality reading too.