‘True Beacon One’ Review—Should You Invest in this AIF?

True Beacon is the new investment opportunity in town, creating a buzz among HNI & UHNI investors.

You may have already heard about it. Especially about its first hedge fund—’ True Beacon One’.

‘True Beacon One’ is an Alternative Investment Fund. It is a pooled investment fund that comes as an alternative to equity mutual funds.

But, what exactly are Alternative Investment Funds (AIFs)?

What are the parameters you should consider before investing?

With the minimum investment of ‘True Beacon One’ being ₹ 1 crore!

Should you invest in the ‘True Beacon One’ AIF?

For an unconventional investment fund, finding answers to these questions can be challenging.

Hopefully, this review of ‘True Beacon One’ will answer your questions in detail. And then, I suppose, you will have the clarity to make the right decision.

Table of Contents:

1.)What are AIFs?
2.)What Kind of AIF is Zerodha’s ‘True Beacon One’?
3.)Features of Zerodha’s AIF ‘True Beacon One’:
4.)Zerodha’s AIF ‘True Beacon One’: Review of Investment Strategy

• The Hybrid Strategy of True Beacon One:

5.)Zerodha’s AIF True Beacon One: Review of Fee Structure:
6.)Zerodha’s AIF True Beacon One: Review of Fund Performance

• Taxation of ‘True Beacon One’:

7.)The Triple Filter Test for ‘True Beacon One:
8.)Filter 1: Is The ‘True Beacon One’ AIF Well Regulated?
9.)Filter 2: Does The ‘True Beacon One’ AIF Have A Good Track Record?
10.)Filter 3: Is The ‘True Beacon One’ AIF Simple & Transparent?

• Exclusivity & Complication Is A Selling Point: Analysis
• The Dark Side of Class Products: Analysis

11.)Final Verdict of Zerodha’s AIF ‘True Beacon One

Before we jump into the ‘True Beacon One’ review, let’s get the obvious things out of the way. That is…

What are AIFs?

AIFs or Alternative Investment Funds are investment instruments that collect money from private investors to invest in almost anything the fund manager sees fit.

The fund manager’s choice of investment can range from Startups, Venture Capital, to Private Equity, Equity, and even derivatives, currencies, etc.

As per SEBI regulations, there are 3 categories of AIFs in India.

• Category I AIF
• Category II AIF
• Category III AIF

The AIF Fund Managers register their fund in one of these categories based on the fund’s investment policy specified by the fund manager.

Nikil Kamath and The Making Of ‘Zerodha’

If A school dropout who is passionate about the stock market sets up his stock brokerage firm. What are the odds of success?

Can you believe, the result is the largest retail stock broker in India in the year 2019?

The company is ‘Zerodha’ by two Indian brothers Nithin Kamath and Nikhil Kamath.

Nikhil Kamath was a school dropout who was interested in the stock market and investing from a young age.

He found his stock brokerage firm ‘Zerodha’ along with his brother in the year 2010.

The addition to that is ‘True Beacon’ In 2020, an Asset Management Company (AMC) that focuses on wealth management for ultra-high-net-worth individuals.

True Beacon has produced a new AIF (Alternative Investment Fund) a ‘Hedge Fund’ named ‘True Beacon One’.

What Kind of AIF is Zerodha’s ‘True Beacon One’?

The ‘True Beacon One’ AIF is a Category III Alternative Investment Fund.

More commonly, it can be called the ‘True Beacon One’ hedge fund.

Further, it belongs to the sub-category PIPE (Private Investment in Public Equity) fund. It is because True Beacon One’s core investment policy is to collect money from Private Investors to invest in Public Equity.

Let’s take a look at the features of ‘True Beacon One’ followed by its investment policy and strategy.

Zerodha’s AIF ‘True Beacon One’ currently claims to have ₹ 1,500 crores as Assets Under Management (AUM).

Features of Zerodha’s AIF ‘True Beacon One’:

True Beacon is a new venture from Nikhil Kamath, the founder of the online investment platform Zerodha.

Similar to Zerodha’s discount broking approach, Nikhil Kamath’s ‘True Beacon One’ promises an unconventional fee structure.

Even though it looks attractive, should it matter to an investor?

The table below shows the features of the ‘True Beacon One’ AIF.

From an investor’s point, the minimum investment required probably takes precedence over all the other features.

It is not only ‘True Beacon One’ but all AIFs require a minimum of ₹1 Crore investment. It is obvious that ‘True Beacon One’ is not an investment product for everyone.

You may also have noticed that the fund has Nifty50 as its benchmark.

It, of course, means that the fund will invest in Large-Cap companies; to try and outperform the benchmark.

But since this is an unconventional investment product, there is more to True Beacon One’s investment strategy.

Let’s take a look at what happens behind the curtains in True Beacon One’s investment strategy. It will give you a better understanding of the Long and Long-Short positions and how the fund works.

Zerodha’s AIF ‘True Beacon One’: Review of Investment Strategy

True Beacon in its official statements says that “True Beacon One follows a defensive hybrid strategy”.

However, unlike an equity mutual fund, the hybrid strategy of ‘True Beacon One’ does the opposite.

While a hybrid mutual fund tries to minimize the risk through asset allocation, ‘True Beacon One’ leans towards higher risk for high returns.

The minimum investment amount of  ‘True Beacon One’ is ₹ 1 crore.

Is it really worth the risk?

Let’s see how the hybrid strategy works to understand better!

• The Hybrid Strategy of True Beacon One:

In its hybrid strategy, ‘True Beacon One’ takes the long position on ~60% of its fund value and a long-short position on the remaining ~40%.

You may wonder what these two “positions” mean.

In AIFs, the long position is when the fund manager buys the shares of select companies to hold them for the long term to create wealth.

Meanwhile, a long-short position is when the fund managers invest based on market trends, macro indicators, and speculation to book short-term gains. In simple terms, it is a complicated trading strategy.

Even though True Beacon says it follows a “defensive hybrid strategy”, it is hardly defensive. Here’s why!

In its long position, the ‘True Beacon One’ will buy and hold shares of large-cap companies to generate returns in the long term. It is no different from classic equity mutual funds.

On the other hand, for the 40% long-short position, the fund manager implements a range of high-risk high-return investment strategies. The intent behind this is to generate alpha in the short term.

This investment strategy may include but is not limited to, investing in Futures, Options, and Equities across the market cap, investing based on the market trends and macros, etc. If necessary, the fund manager may also choose to borrow funds to invest.

Hence the risk of the fund is definitely on the higher side than it appears to be on the outside.

Zerodha’s AIF True Beacon One: Review of Fee Structure:

The fee structure of ‘True Beacon One’ sure looks like an attractive feature.

The fund has no Asset Management Fee or Entry/Exit fee. Along with these, the no lock-in appears too good to pass up for the investors.

However, it does not mean that the True Beacon has no charges.

‘True Beacon One’ has a Carry rate of 10%—i.e. the fund manager will charge 10% of the profits as a performance fee. What’s more interesting is that this fund has no Hurdle Rate.

The hurdle rate in AIFs is like a threshold for the fund manager to deduct the Carry Fee.

For example, ‘True Beacon One’ will charge 10% of the profits from the fund as the Carry Fee.

If it had a Hurdle rate of, say 12%, the fund manager can deduct the Carry Fee charges of 10% only if the fund generates a return of 10% or above.

Since the ‘True Beacon One’ has no Hurdle Rate, the fund manager will continue to deduct the Carry Fee—regardless of whether the fund generates a 2% return or a 12% return.

In this context, the zero Asset Management charges may not be as attractive as it looks.

Zerodha’s AIF True Beacon One: Review of Fund Performance

Even though this fund was launched only recently—on 01 September 2019—’ True Beacon One’ Fund Performance has managed to outperform its benchmark.

The chart below shows the growth of ‘True Beacon One’ as compared to Nifty50.

Now, this certainly looks like a promising Fund Performance.

The 2-year period taken here is from 1 September 2019 to 30 July 2021. That is, starting from the inception of the True Beacon One fund.

Since the fund aims to outperform the index by at least 6% per annum, it is up to its set standard so far.

But there is more to it than what meets the eye.

For instance, the ‘True Beacon One’ returns shown in the table above are pre-tax values.

• Taxation of ‘True Beacon One’:

The 30.5% CAGR of the ‘True Beacon One’ is not in the hands of an investor.

Since the ‘True Beacon One’ is a Category III AIF, the gains are taxed at the fund level, like an equity mutual fund. However, the tax rates are far different and higher than an equity mutual fund.

For example, equity mutual funds levy LTCG @ 10%. Also, it has an exemption for gains up to ₹1 lakh per annum.

The ‘True Beacon One’ incurs LTCG tax at a rate of ~12%—with no exemptions. It is only 2% higher than an equity mutual fund scheme. However, this ~12% LTCG tax is only for the gains earned through equity investments.

If the gains are through trading income (business income), which is more likely with AIFs, the tax applicable will be @42.74%.

The table below shows the different applicable tax rates to a Category III AIF.

On the surface level, the returns from the ‘True Beacon One’ may have convinced you about its performance. Taking the taxation into consideration, the ‘True Beacon One’ return is reduced significantly.

You, or any responsible investor, need to be vigilant and be able to critically view an investment product.

There may be too many blind spots that you are not aware of. Besides, 2 years is too short a period to assess the Fund Performance of ‘True Beacon One’.

We will discuss more on this in detail later in the Triple Filter Test for ‘True Beacon One’.

So what should an investor look at when assessing this ‘True Beacon One’ fund?

The Triple Filter Test for ‘True Beacon One:

To be fair, ‘True Beacon One’ is a tempting investment product if you are an HNI or a UHNI.

And seeing its recent performance and the relatively low fee among AIFs, it may seem convincing enough to invest.

Even if ‘convincing enough’ is more than enough for you, remember one thing.

“Test Your Investments, Before It Tests Your Temperament”

Be it the ‘True Beacon One’ or any other investment instrument, you can test their quality by putting them through 3 tests or filters.

These 3 filters are only 3 simple questions directed towards the investment product in consideration—in this case, ‘True Beacon One’.

If ‘True Beacon One’ successfully passes these filters, you can, with a degree of certainty, add this fund to your investment portfolio. So, let’s begin.

Filter 1: Is The ‘True Beacon One’ AIF Well Regulated?

Is adding AIF ‘True Beacon One’ safe to your Investment Portfolio?

Unfortunately, there is no definitive answer.

Regulation of the investment product may seem like an obvious factor. Yet, surprisingly, it is one of the most overlooked ones.

Supervision of a regulatory body helps to keep the in the best interest of the investor than the product sellers or managers.

True Beacon is an AIF. The fund indeed has to register with SEBI and share its investment policy, etc. However, ‘True Beacon One’ is not supervised or regulated by the stringent rules of SEBI as it is with equity mutual funds.

Hence, at best, ‘True Beacon One’ is a SEBI-registered investment product but as a class product, it has less transparency and no stringent regulation when compared to a Mutual Fund product.

Should stringent regulation matter to an investor?

We know that equity mutual funds can invest only in the listed companies. And the companies listed in any exchange should be transparent about their financials as per the guidelines of SEBI.

Likewise, AMCs and fund managers also need to adhere to the rules of SEBI.

For example, in April 2021 SEBI mandated that a minimum of 20% of the fund managers’ salary should be paid as units of the scheme they manage. It makes the fund managers have a vested interest in delivering consistent performance—thereby benefitting the investors.

AIFs do not have systemic compulsion to act in the best interest of the investors. And the investor is required to trust the fund manager alone.

Filter 2: Does The ‘True Beacon One’ AIF Have A Good Track Record?

‘True Beacon One’ has delivered a return of 30.5% over the past 2 years. And it has outperformed its benchmark by a good margin.

Even if it is pre-tax returns, it counts for something, right?

So it should be good to add Zerodha’s AIF ‘True Beacon One’, to your Investment Portfolio. Right?

Not exactly!

To begin with, the past 2 years have been a peculiar period in the Indian stock market history.

In 6 months of True Beacon One’s launch, the market crashed because of the Covid-19 pandemic. While everyone thought that the recovery is nowhere near, the market recovered in another 6 months and continued to rally since then.

As a result, the ‘True Beacon One’ fund has seen more days of overvaluation and wild positivity than dull days. And a very few days of contagious pessimism that weeds out the weak investment strategies.

Even though it is not evidence, there is an indicator to support this.

In the performance chart, you can notice that in the first 6months, the fund has struggled to even beat the benchmark.

Despite the gradual growth, the pre-Covid-19 period of 2019 and the initial months of 2020 were a boring phase for the Indian stock market.

There was no panic of the pandemic or the long bull market to take advantage of for short-term gains.

Keeping that in mind, this ‘True Beacon One’ return is most probably luck in disguise rather than the fund’s investment strategy.

Moreover, a complete market cycle is considered to be about 7 years. In this period, an investment product will see almost all phases of the market. If indeed the fund’s investment policy is good enough, it will survive the turbulence of the market and generate a good Fund Performance

Hence it is still too early to conclude that ‘True Beacon One’ is a good fund. And it will be unwise for any investor to say otherwise without risking loss and regret.

Filter 3: Is The ‘True Beacon One’ AIF Simple & Transparent?

Alternative Investment Funds are not simple or transparent in any way.

The AIF ‘True Beacon One’ is no exception.

It is a complicated investment product designed for sophisticated investors with an extremely high-risk tolerance.

This is evident by the fact that AIFs in India are not publicly issued products.

Instead, these are ‘private placement products’ that reach only those who the product sellers see fit. I.e., HNI and UHNI investors with the capacity to tolerate the extreme risks that come with the fund.

• Exclusivity & Complication Is A Selling Point: Analysis

Making the AIFs a “Private Placement Product” seems completely logical.

It requires a minimum investment amount of ₹ 1 Crore, hence it is not for everyone.

But when you think about it, it also has a self-serving aspect to it.

Complicated products such as the ‘True Beacon One’ and other AIFs create an exclusivity illusion to draw investors.

For example, an investor with a ₹5 Crore worth of investible surplus will probably have already invested in almost all conventional investment products. Fixed Deposits, Equity Mutual Funds, Stocks, real estate—you name it.

But then comes an Alternate Investment Fund.

It claims to “Disrupt the Status Quo!” or “be the pioneer of changing the world by funding Startups”. It is a product “designed for class investors”.

It sounds good—seems to have a greater purpose for the investor. Along with it, comes the promise of a reward. The illusion of exclusivity eventually lures in gullible HNI & UHNI investors.

But why is this an illusion?  Or why is transparency important?

• The Dark Side of Class Products: Analysis

AIFs are extreme-risk investment products. In other words, it means that a lot of things can go wrong, very often.

In such a product, if indeed something goes wrong, what happens?

We have already seen that ‘True Beacon One’ or AIFs are not having stringent regulations like Mutual Fund products. It leaves another vulnerability for the HNI and UHNI investors.

Will the Govt. or SEBI or any regulatory body prioritize addressing the issues of a private-class product?

For example, in April 2020, FTI decided to wind up 6 debt mutual fund schemes because of the issues in its underlying investments.

Close to ₹26,000 Crores of retail investors’ money were locked in these 6 schemes.

It immediately gained nationwide attention. SEBI intervened to address the issue in the best interest of the investors. SEBI fined the people responsible for the issue.

Over a period, all the investors were able to recover their investments from those 6 funds.

In addition, SEBI also ruled that the AMC should refund the fee charged on these funds to the investors with a 12% interest. Also, it barred the AMC from launching any new debt fund scheme for the next 2 years.

The Supreme Court of India, in a judgment, said that AMCs should seek the approval of the investors before winding up any mutual fund scheme.

Even though it is the rarest of the rare cases, it happened even to a debt mutual fund scheme. SEBI and the Supreme Court of India intervened, and the investors were able to recover their investments.

It was all possible only because they all were a product for the masses, involving millions of investors.

Now imagine the same thing happening to an AIF. The funds are privately placed, less transparent, and complicated investment products. Hence if anything goes wrong, that is probably the end of your investment.

“Private” is just a fancy word for lack of transparency.

‘True Beacon One’ is not a mass product, but a class product. And class products are always complicated, and almost always less transparent.

Final Verdict of Zerodha’s AIF ‘True Beacon One

As per our assessment, ‘True Beacon One’ has not passed the fundamental triple filter test.

It is a complicated product made for sophisticated investors. It will lack the transparency that any rational investor desires.

And when we add the fact that ‘True Beacon One’ is only partially regulated, it makes it even more undesirable to a retail investor.

Moreover, the ₹1 Crore minimum investment is not an insignificant amount to an investor by any degree.

Exposing a huge capital to a not stringently regulated investment approach could make this risk two-fold or even higher for the investor.

Even if you are an HNI or UHNI and looking for AIF to invest in, ‘True Beacon One’ does not have a proven track record to justify investing ₹1 Crore in this fund.

Do Not Invest in True Beacon One!

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