The recent statement by Zerodha’s Nithin Kamath made it clear that equity futures and options are not for everyone. In his latest newsletter, the country’s leading stockbroker said that less than 1 per cent of those who actively trade in equity futures and options generate returns higher than bank fixed deposits (FDs) or 7 per cent annually over 3 years.
The market watcher said that generating profits from active trading is as hard as generating profits while running a business. The newsletter further highlighted that Zerodha has diversified its portfolio among various assets. “With our own funds, we invest in bank fixed deposits (FDs), government bonds, and have a long-term stock portfolio,” Kamath said, adding they neither leverage (borrow to trade more) nor trade any leveraged products like F&O, which can lose more money than the capital at stake.
“This is to ensure there is no risk due to our treasury operations to the business. Our portfolio currently has exposure of 33 per cent to bank FDs, 32 per cent to stocks, 13 per cent to government securities, 9 per cent to tax-free bonds, and 13 per cent to gold bonds,” he said.
The co-founder and CEO of Zerodha added that the odds of succeeding when actively trading are very low. Many customers decide to trade risky products with leverage with the wrong expectations that money can be earned easily and quickly. This problem has been accentuated by many claiming to generate large amounts of trading profits on social media.
He further said that across their customers over the last many years, they have seen that the higher the leverage, the lower the chances of profitability. “The profitability numbers are much lower in the case of equity F&O as most trading happens in options, especially buying options which is the riskiest and the most leveraged product,” Kamath added.
Well-known equity investor Vijay Kedia once said that smoking may kill you in 20 years, but trading in stock futures can kill you the next day. The statement by Kamath also indicates that 99 per cent of traders have either received less than 7 per cent annual return in the past three years from trading in equity futures and options or may have eroded some of their wealth.