Nithin Kamath tells how retail investors can beat seasoned fund managers and earn more returns in the equity market

It is possible for retail investors to earn higher returns in the equity market, beating indices and even seasoned fund managers, with their agility and small capital. However, it can also pose a higher risk to the portfolio. Nithin Kamath, founder and CEO of Zerodha, told in an interview that retail investors might have an advantage over the fund managers of the big AMCs themselves.

Unlike fund managers and HNI investors, those trading with smaller capital have the ability to modify their course of action whenever necessary; they can move in and out of assets at will, Nithin Kamath said. Small investors have no obligation to deploy cash immediately and have the freedom to wait to deploy funds – something fund managers do not have. However, Nithin Kamath is quick to add that it is almost impossible to time the market correctly and consistently.

Watch the full interview with Nithin Kamath, Founder and CEO, Zerodha

Retail investors can sell; fund managers are required to hold

“If I am a retail trader and I have a lakh of rupees in a stock where I feel the next month is going to be bad, I can get out in a second,” Kamath said, adding, “So traders retail investors have an advantage over large traders and fund managers.While large investors may have the upper hand in what information they can access, it can be difficult to act accordingly with the large capital that they manage.” Say I’m a fund manager and today I’m bearish in the markets, I can’t sell my portfolio. The regulations say you can’t sell, you can’t hold more than 15-20% cash, which means I’m forced to go long almost always,” Kamath said.

Read also : Nikhil Kamath’s formula for earning stellar returns in the stock market: Hedge against big losses, let compounding work

But, could retail investors still beat fund managers?

Even then, there is a very small minority of retail investors who could consistently beat the markets and fund managers, as it is extremely difficult to determine when to enter and exit various stocks consistently. According to the founder of Zerodha, the few retail investors who could beat fund managers in terms of CAGR are usually active traders, instead of equity investors. Intraday or options traders are not subject to the same regulations as large investors; they can take profits in a trade whenever they want and have the ability to be more nimble.

law of diminishing advantage

Moreover, as traders focus on earning returns only for themselves, they are able to take on more risk, which gives them higher returns, he added. Overall, their returns could be higher than the index, but it’s very difficult to scale their business. The benefits decrease as the capital traded increases, as traders are unwilling to take the same risks or use the same strategies because there is more to lose.

Robert D. Coleman