Zerodha MTF Risks: Kamath Warns as Business Hits ₹9,000 Crore

Zerodha founder Nithin Kamath has expressed significant concerns regarding the rapid expansion of the company’s Margin Trading Facility (MTF) business, which has grown to ₹9,000 crore. Despite contributing 10% of Zerodha’s revenue through interest income, Kamath deems MTF largely unsuitable for most retail investors.

MTF allows investors to acquire shares by paying only a fraction of the total investment upfront, with the remainder funded by the broker. While this mechanism can amplify an investor’s market exposure, it simultaneously escalates risk, particularly during market downturns where leverage magnifies losses.

Key MTF Figures and Risks

• Zerodha’s MTF business has reached ₹9,000 crore.
• MTF contributes approximately 10% of Zerodha’s revenue via interest income.
• Clients have borrowed around ₹6,000 crore, representing about 25% of Zerodha’s net worth.
• Brokers can borrow up to five times their net worth, posing broader systemic risk.
• Zerodha requires substantial capital, around ₹11,000 crore, due to regulatory mandates.

Kamath stressed the critical importance of educating customers about the inherent risks of MTF rather than encouraging them to borrow for investments. His apprehension is fueled by the substantial MTF book and the potential for market contagion during a sharp correction.

Domestic Equities Stagnate Amid Global Gains

Indian equities, as measured by the Nifty 500, have shown little movement over the past two years, a stark contrast to the strong performance seen in international markets. These include the US, Japan, Europe, South Korea, and Taiwan, which have recorded significant gains.

This subdued domestic market performance is attributed to several factors:

• A lack of major AI-related investment opportunities in India.
• Persistent pressure on the rupee.
• Continued outflows by foreign investors.

For investors utilizing MTF, leveraged positions become particularly precarious in stagnant or falling markets, as losses are amplified while interest accrues on borrowed funds. Kamath also criticized some competitors for imposing additional charges and uncapped brokerage fees on MTF, questioning their classification as discount brokers.

Investors are advised to scrutinize all associated charges and borrowing costs beyond just headline brokerage rates when considering Margin Trading Facility options.