The co- founder of Zerodha and TrueBeacon is buying a lot of gold. The fund manager has accumulated gold to the tune of 15 percent of the fund's portfolio as he looks to hedge against inflation.
Kamath's vote of confidence for gold as an inflation hedge runs against the current trend where global institutional and retail investors have been buying Bitcoin to protect themselves against runaway inflation.
When cryptocurrencies become uncool, I think gold will become cool. Kamath told Moneycontrol in an interview that gold will become more attractive if there is a crash in the stock market.
Kamath talked about the case for the government to rationalize taxation on dividends, securities transactions, and equity derivatives.
The excerpts have been edited.
Over the past three months, we have seen a very rangebound market with bouts of selling pressure. Is it okay to dip into the market at this level?
I don't think so yet, especially when it comes to companies like Zomato and others. Their valuations didn't make sense from the beginning. Buying companies that are loss-making 1,000 times and 1,500 times multiples is not sustainable. I don't see where the rationale is to enter these stocks.
Ahead of the Budget and the inflation worries we have at hand, it is not the right time to enter the markets. The correction is small when you look at it. For a market that has rallied 100 percent, a 3-4 percent correction is not something I care about.
Do you want to see more downside to be comfortable on the valuation front?
I think so. Our GDP was less than it was in the previous year. We are in a bad situation. It doesn't make sense that the market has rallied so much more than before. I have been on the market for a long time. 50 percent of our funds are hedged.
There is a budget around the corner. What do you think the overarching theme will be for the government?
The government is good with their timing. I would be surprised if they reworked the Budget based on how sentiment has changed over the last fortnight. There are some things that I think should happen. If you become a promoter, you pay 25 percent tax on the profit and 43 percent on the dividends, which results in a net tax rate of 53-54 percent. Something should definitely be done in that area, I don't think it is a good idea.
We have been asking for something to be done about STT for the last 10 years. It is not a tax on income. This makes it harder to get foreign capital into India. The markets need to be deeper, and removing STT will bring down the impact cost. It will bring in more revenue for the government.
Taxes on derivatives would be the third thing. I don't understand why derivatives are taxed at the maximum tax rate because they are meant to hedge risk. It's discouraging when it comes to category III AIF funds that don't have pass-through taxation. A lot of money is brought into the capital markets by category III funds. In the last year and a half, 50,000 crores. It is not taxed like a mutual fund even though it is a product. I think category III AIFs should be taxed like other AIFs.
There is a lot of talk about the rural economy slowing down. The demand at the aggregate level seems to be lagging behind other aspects of the economy. How do you handle this situation as a fund manager?
The rural economy is going to move towards aggregation as it has in the West and other countries. Smaller farms will aggregate and become larger farms. I think the key is to help the farmers who will no longer have a job. The government needs a lot of resources. For a country with a lot of wealth and a lot of people, only 3 percent pay any tax. 97 percent of the country doesn't earn money. No! It does. It is the most ridiculous thing. If someone buys an expensive home through not the cleanest of means, they should be taxed upfront. I think that needs to be done. Tax on farm income above a certain threshold, property taxes, inheritance tax, all of this will give the government money to take care of the rural population and improve infrastructure.
There are a lot of things the government could do to aid demand, but where does it get the money to do it? From a portfolio perspective, you do avoid consumption as a theme for the time being given the slack that we are seeing on the demand side of things.
There is an argument that value counters can do well in high interest rate environments. Are you looking at energy, utility, and metals?
I am looking at commodities. I like gold a lot. I have been adding a lot of gold to my portfolio. It has gone up to 15 percent of the portfolio. Gold is a good hedge against inflation. When cryptocurrencies become uncool, I think gold will become cool. I think gold will become more attractive if the crash in cryptocurrencies speed up.
The entire green energy space is a segment of the market where the hype is high. Do you think there is a need for caution on the part of investors?
It sounds silly, but I blame the media. None of the stories are researched. Nobody reports what is actually happening. A lot has to be kept in mind when it comes to electric vehicles. Sure, we are selling electric vehicles, but are we still burning coal and losing 50 percent of the electricity we produce by the time it reaches the electric car to charge it? The way the EV story is being sold is not true. Coal will become interesting in the near future because people have ignored it in the last few years. You can already see that with crude oil prices going up, it will happen for other energy commodities as well.
Given the subdued start to the year, what is your outlook for the rest of the year?
I, personally, find these rallies where the market goes up 40-50 percent to be bad for the ecosystem. They go up fast, and they come down faster. I would be much happier with a market that is slowly trending upwards, rising 7-8 percent every year. I hope after a correction, whenever the next big one will happen, we go back to reasonable valuations. I hope we start trending like that and avoid bubbles because bubbles do not help anybody. They hurt the retail investor much more than anybody else.
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