Is MTF a good product for customers? Zerodha's Nithin Kamath says it isn't suitable for most of them: Here's why

For consumers, borrowing money to invest can be far riskier, as market losses can quickly turn a leveraged investment into a financial burden.

Margin Trading Facility (MTF) allows investors to purchase shares by paying only a portion of the investment upfront, while the broker funds the rest. This can increase an investor’s market exposure, but it also means higher risk if share prices fall.

Let's look at why Zerodha Founder and CEO Nithin Kamath is becoming increasingly cautious about the MTF.

“With the start of the MTF (margin funding) business in Dec 2024, there’s been some predictability in revenue, since we earn interest income on it. MTF currently makes up ~10% of our revenue,” Kamath mentioned in his note titled 16 years of Zerodha: Fresh enthusiasm.

However, he said the product may not be suitable for most customers. “But if you ask me whether MTF is a good product for customers, I’d say it isn’t for most of them,” he noted.

For retail investors , this is an important distinction. MTF may increase purchasing power, but it does not reduce investment risk. In a falling market, leverage can work against the investor just as quickly as it works in their favour during a rally.

“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 added.

Kamath’s concern is also linked to the rapid expansion of the business. “MTF is one area where the business growth is scaring me. Our MTF book now stands at ₹ 9,000 crores, and the risk here is that the Indian markets could fall sharply,” he noted.

“Leverage always looks great when markets are doing well, and the risks become obvious only when things go wrong,” Kamath added.

He said Zerodha is keeping a close watch on the MTF business because a sharp market correction could expose the risks associated with leveraged positions.

“While the book size is ₹ 9000 crore, our clients have borrowed ~ ₹ 6000 crore, which is ~25% of our net worth,” he said.

Kamath also flagged the broader systemic risk from leverage in the brokerage industry.

“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,” he noted.

Kamath’s comments come as Indian equities have remained relatively subdued while some global markets have performed strongly.