‘If there were a market contagion’: Why Zerodha’s Nithin Kamath finds margin funding business scary

Zerodha founder Nithin Kamath said the Margin Trading Facility (MTF) business at the second-largest stock broking firm is “scary”, citing the risk of a sharp fall in Indian markets. In a note to clients, he said leverage always looks great when markets are doing well, but the risks become obvious when things go wrong.

"So this is one area we are keeping a close eye on," Kamath said.

The billionaire broker said while the margin funding book size at Zerodha stands at Rs 9,000 crore, his clients have borrowed Rs 6,000 crore, which is 25 per cent of Zerodha's net worth. "This MTF business is scary, as brokers can borrow up to 5 times their net worth. While we are okay, we might get pulled down if there were a market contagion due to this leverage," Kamath said.

Zerodha MTF biz now 10% of revenues
Zerodha started the MTF business in December 2024. Kamath said there has been some predictability in revenue, since we earn interest income on it, with MTF currently making up 10 per cent of Zerodha's revenue.

"But if you ask me whether MTF is a good product for customers, I’d say it isn’t for most of them. The only thing we can really do is educate customers on the risk and not push it constantly or nudge them into borrowing money to invest," Kamath said.

Kamath noted that the pace at which Zerodha is adding new accounts has moderated, given that the markets have not performed well. The dip in accounts coincided with the market’s peaking in September 2024. Some of Zerodha's competitors continue to add more people, especially from North and East India, Kamath said. At last count, Zerodha had 15.2 per cent market share in terms of active clients.

Zerodha's AUM largest
Kamath said trading account can come and go, but AUM typically sticks around. In that context, he said Zerodha is now the largest in India, and all of it comes from retail or HNI holdings.

Nithin Kamath on stock market 
He said Nifty500 has gone nowhere in the last two years, while international markets like the US, Japan, Europe, South Korea, and Taiwan have been on a roll. These two years have seen the biggest bull market in AI-related stocks ever, and Indian public markets have not really had an AI play, he said,

"We don’t have frontier labs, big semiconductor plays, memory manufacturers, data centres, or anything of that sort. So Indian markets have been stuck in a sideways phase," Kamath noted.

Energy crisis, CAS
As if that was not bad enough for India, said Kamanth the energy crisis triggered by the war in the Middle East has made things worse.

"The rupee has been under pressure, and since we import pretty much all our crude, gas, and gold, we’ve been hit badly. FIIs pulling money out have made things worse still for the rupee," he said.

Kamath said there have been some teething issues with the implementation of CAS, but that was expected.

"That said, the downside is that the bull market has clearly hit a pause, and as a result, the pace of new user growth and overall activity has slowed down significantly. However, there is a definite bull market happening in the IPO space, with issues daily. India is probably the IPO capital of the world right now," he said.