Major equity markets across the globe, including in India, have seen a rally since the crash in March. This seems to have attracted a lot of new investors to the market. New customer additions have now almost doubled per month than before COVID-19 hit, Nithin Kamath, co-founder and CEO of Zerodha, the country’s largest broking firm, told THE WEEK in an interview. Despite the investor enthusiasm, Kamath has a word of caution and says investors would be better off holding more cash in hand right now, given there is still a lot of uncertainty on how countries are going to overcome COVID-19 and the economic and financial impact this pandemic is going to have. Excerpts:
In the last few months, there seems to have been a huge growth in equity investors. Could you share some details?
In the last three-four months, retail (investor) activity has picked up significantly, not just in India, but a lot of other markets across the world. Various factors have enabled it. One, people are working from home so they have more time in their hands to think about their finances. Second, interest rates around the world have crashed. So, the money in the bank is not yielding you as much, so people are looking at alternatives. Three, there has been a lot of interest in the bounce back as well because the stocks had fallen so much that it all looked very cheap. People bought it at that time.
What’s the kind of growth at Zerodha during this period?
We were adding 70,000 to 1 lakh new customers before COVID-19. The month of March was the biggest month for us, when we added about 3 lakh accounts. Now, we are averaging between 1.5 to 2 lakh new customers a month. So, we are adding new customers—almost 100 per cent more than what we were adding in the pre-COVID days. Trading volumes, not just for us, but for the exchange and for other brokers are up at least 40-50 per cent. Since, this period has seen so much more volatility, trading volumes are up because of that as well.
How many customers does Zerodha have now? What are the average trading volumes?
We are around 30 lakh customers now, of which active customers are around 18 lakh to 19 lakh. In terms of trading volumes—we look at it in a number of trades—we are averaging 50 to 60 lakh trades daily.
While investors are focusing on the fact that stock valuations are cheap, are we discounting the COVID-19 pandemic and its economic impact?
If you look at the markets, even the NASDAQ is almost at an all-time high, while you are listening to all this news about job losses and some businesses having trouble. At least in India, the rally has been tepid, you are still away from the all-time high. But, the US markets have been crazy; almost as if, nothing has happened. I am still not sure about all the optimism. My view is slightly pessimistic. But, at the end of the day, you have to believe what the price of the stock says it is. I think the bad news is already in the price, but incrementally, if there is a second wave or a third wave in different countries, we may be in for another fall.
So, should investors be more cautious now or go big on equities?
Personally, if someone were to come and ask me, I would say this is the time to be sitting more on cash than on stocks. There is uncertainty around. On our platform, we have been generally slowing people down, if they are buying penny stocks and all that, because we don’t want speculative activity to build up. So, if you log in and try to buy a penny stock, we typically slow you down significantly. So, it makes it tough for you to buy that stock. We are trying to see if we can use the platform to curb some of the excesses. So, yes, there is a lot of uncertainty, I don’t think the worst is behind us. Until there is complete clarity, it might not be a smart thing to be putting more than 10-20 per cent.
You may want to slow things down, but what are your observations as far as investor behaviour goes?
The good thing is, we do not see people really buying speculative stocks. Most of these customers are buying pedigree, popular companies like HDFC, Reliance, etc. That way, it's good behaviour. When you are buying good stocks, most likely you are not going to see a deep cut, even if something went wrong. But, if markets continue to remain bullish, at some point there will be excesses. We still have not reached that stage. I think, US markets are right now in a place where investors are just buying anything and everything. The US is probably at the peak of the bull market. The problem for the rest of the world is that the US is the mother of all markets. If something happens there, everyone will get affected. So, we might not reach that amount of speculation and crash, if the US markets crash first.
There have been some complaints about technical issues on Zerodha’s platform over the past few months. How are you addressing that at a time the number of investors and number of trades have seen a big increase?
In the last one year, we may have had an issue time of around 40 minutes. This might be an uptime of 99.96 per cent. If you were to compare our uptime as a percentage with the industry, we by far would be much better than any other broker in the industry. We also power almost 15-20 per cent of all retail trades, which means, almost 15-20 per cent of the market. So, if there was an issue at our end, it affects a lot more people and it just gets noticed much more on social media. But, that said, the only thing that we have constantly worked towards is making sure the platform is up 100 per cent of the time. But, in a technology business there is no way you can be up 100 per cent, no where in the world. There are going to be down times. At 99.95-99.96 per cent, we are at an 'okay' level. Still, we would want it to take to 99.99 per cent.
Recently, a large full-service stock broker, announced plans to set up a new discount broking company. Are more people choosing or shifting to discount brokers, driving growth for companies like Zerodha?
A lot of people think Zerodha is popular due to its pricing. But, that is not the case. There are many others who offer as much for less. It is a better product, which is what gets people to us. Historically, what has happened in the industry is that people who didn’t have a great product, were offering different leverages to customers. SEBI has been going after a lot of such brokers. So, if Zerodha or any other broker were to offer exactly the same services in terms of risk management, intraday leverages, you would automatically come to a product, which is better. In the last four-five months, most new customers are going towards online products. All the new benefits have been for the online players.
Why did you decide to get into the mutual fund industry, which already has over 40 players?
Like how we envisioned a different kind of broking firm, the way we have thought about mutual funds is different than the current asset management companies who are running the mutual fund business. What we are thinking of is a tech-first, passive only fund that is solving people’s problems in a way. Today, a first-time investor would get intimidated by things like small-cap, multi-cap—a lot of these things a lay man doesn’t know. So, buying mutual funds has to be simplified. With Coin—our direct mutual fund platform—we tried to do something (different). But we realised that in mutual funds, you have to be a manufacturer, you just can’t be a distributor and try to simplify, because the mutual funds themselves are quite complicated.
What’s the update on the mutual fund license?
COVID seems to have slowed down the application process. Typically, a mutual fund application process is a 12-14 month affair.