Budget 2025: From STT to capital gains tax - Shankar Sharma’s wishlist for FM Nirmala Sitharaman

As anticipation builds for a pro-growth and reform-oriented Budget 2025, ace investor Shankar Sharma, the founder of GQuant, an AI-tech company, calls for bold tax reforms—scrapping STT and slashing capital gains tax—arguing that hiking it was a misstep. Sharma argues that increasing government spending is a limited-period strategy. 

In an exclusive interview with Mint's Nishant Kumar, he also discussed why Donald Trump is a risk more to America itself than to the rest of the world. Here are edited excerpts from the interview:

What, in your opinion, would constitute a market-friendly Budget this year?

They should reduce capital gains tax on equity investments and also remove STT. Increasing capital gains tax was a bad idea. Pure and simple.

Which sectors appear most promising to you in the current environment, and why?

I don't look at sectors. India is the best market for bottom-up opportunities. Even with bad macros, we will have plenty of opportunities.

How would you assess the current market trend? Are we facing further downside risks?

We have had five very good years of a bull market starting from the pandemic lows. Therefore, the bull market is ageing. This is not young by any standards.

When a bull market ages, it starts to react negatively to general news, while when it was younger, it would have shrugged such news off. So, there is generalised fatigue all around.

With downward revisions in India's GDP growth estimates, is the "India growth story" narrative losing its charm?

India's growth story was based on government capex (capital expenditure), and I have talked about this in several interviews with your newspaper.

This growth will eventually slow down as the government starts to tighten up the fiscal deficit, and that is exactly what is happening. 

Growth based on government spending has a finite lifespan. We are drawing closer to this rapid growth phase for the country.

How significant is the "Trump factor" as a risk for emerging markets like India?

Donald Trump poses a greater risk to America than to the rest of the world. His only plan seems to be raising tariffs, and I fail to understand how, on earth, that is good for America.

It will simply raise the cost of goods and inflation and reduce the purchasing power of Americans.

Think of it this way: he has threatened Colombia with higher tariffs on coffee. Let us say Colombian coffee was getting imported at $5 a kilo, 1,000 tons pa. If the prices become $6 per kilo because of tariffs, do you think Americans will start consuming less coffee? Absolutely not.

So, they will end up paying more for their coffee, thereby reducing the size of their wallets for other things.

In my view, Trump is bad news for America, and he does not matter much to the rest of the world.

In an era of rising protectionism, should the government prioritise growth by increasing spending, even at the expense of fiscal consolidation?

This is a limited-period strategy and cannot be long-term because it results in increasing public borrowings to fund such spending, which in turn crowds out private capex because it raises the cost of capital. India needs to find other growth levers, not just government capex.

With economic growth slowing, could we be entering a prolonged phase of subdued corporate earnings?

For large companies, absolutely. This has already been invisible in the last couple of quarters, and I saw nothing changing for the better for large companies.

For smaller companies, it's a very different picture because they derive their growth from very tiny markets, not from the overall country's GDP growth. This is exactly why I find small caps, which are picked selectively, to be excellent opportunities.

You have recently highlighted the concept of "return decay." Could you explain its significance and why investors should pay attention to it?

The concept of return decay is extremely powerful, and this is my own invention, after observing market and stock behaviour for over 40 years.

Basically, for any great growth company, the best years of stock performance usually occur in the first five years. That is the period in which you get blowout results and blowout stock performance.

It is very much possible that in the first phase of growth, the stock price may compound by 50 per cent or more for five years. It is at that point that prudent investing dictates that you take at least 30 or 40 per cent of your earnings off the table because, after this, the next period of growth will be substantially less.

This is what return decay is all about.

The initial period of blowout growth is almost never replicated in the second period and then even less in the third period, and overall, over a 20-year period, the best case you can get from a stock is around 25 per cent compounded, and that is absolutely the best case. Most companies will not get close to this.

This means that on a probability basis, investors should be smart enough to take the money off the table to the extent of around 30 or 40 per cent of their holdings in the first phase of blowout growth and then gradually over a 20-year period assuming that everything is working well with the company, keep taking money off the table.

This is contrary to what almost everybody preaches in the market, which is to buy and hold and forget any great company. However, the fact of the matter is that when you look at the data, and if you are indeed a data-driven investor, then return decay will set in after the initial period of 50 per cent CAGR and then get progressively lower.

Recognising this phenomenon is extremely powerful for return capturing and capital growth because, by doing so, you will be able to move on with your book profit to something else that is just beginning to explode in terms of its return cycle.

Could you please also explain the significance of the "SSIPHO method" in markets in brief?

Again, after all my experience, I invented this: the "Shankar Sharma Intermittent Portfolio Hypoxia" (SSIPHO) Method.

In a nutshell, this method dictates that instead of trying to avoid losses, as investment gurus have conventionally told us over decades, the SSIPHO method seeks to actively encourage and engender losses in the portfolio. However, it is done in a calibrated manner in which the losses are non-lethal.

This involves creating a portfolio of around 50 stocks and sometimes even slightly more, depending on market conditions.

On a purely statistical basis, the portfolio will contain at least 30 or 40 per cent loss-makers.

Normally, when you see losses in the portfolio, you tend to freeze like a deer in the headlights.

But because you are spreading your portfolio over 50 stocks, the loss-makers will rarely exceed 40 per cent of your portfolio, while 50 or 60 per cent will make you profits.

By doing so, you will never lose aggregate money, or substantially, but you will get used to the notion of taking losses frequently and periodically. In this fashion, almost like the way a vaccination works, you will become inured and immune to losses.

The moment you adopt the mindset that losses don’t matter and that taking losses actually strengthens the rest of your portfolio, you immediately set yourself apart from millions of investors who fail to make big money in the markets because they either cannot take losses or struggle to recognize and book them.

The SSIPHO method is extremely valuable, and I have used it with excellent results.

This idea came to me from the concept of hypoxia training, a concept derived from the 2019 Nobel Prize in Medicine, which explored the strategic use of oxygen—and its absence.

I have converted that basic path-breaking science into a portfolio management method and what periodic hypoxia, which is a lack of oxygen, does to the body, which is amazing benefits. Small doses of losses do exactly the same thing to your portfolio.

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