Zerodha's Nithin Kamath just revealed what's scaring him lately

Zerodha founder and CEO Nithin Kamath just issued a stark cautionary note about a marked-linked aspect that has been in the news on and off lately.

Kamath warned that the brokerage’s expanding margin trading facility (MTF) business could become a source of stress if Indian equities face a sharp correction. This comes even as the lending activity has emerged as a key revenue stream for the company, news agency Bloomberg reported on August 27.

Kamath, in his annual note to Zerodha customers as the brokerage completed 16 years, said the company’s MTF exposure had risen significantly.


The growing leverage has increased interest income for Zerodha but also means the broker could face pressure if a broad market selloff triggers forced exits by leveraged investors.

If such a thing happens, it could cause unforeseen levels of stress in the business. A sharp correction could create a feedback loop in which falling prices trigger additional selling by investors who have borrowed money to hold stocks.

Interest earned from funding clients’ leveraged positions now contributes about a tenth of Zerodha’s revenue, according to Kamath.

It may be noted here that the company’s MTF book had reached around Rs 9,000 crore in August, with clients borrowing about Rs 6,000 crore to finance stock purchases.

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The increase comes against a broader rise in margin-funded equity investments in India. Investors had borrowed a record Rs 1.36 lakh crore through MTF by July, even as activity in the cash market had moderated.

The growing use of leverage has raised concerns that a sudden market decline could lead to margin calls and forced selling, potentially intensifying losses.

Kamath had highlighted the same concern previously as well, particularly in the small- and mid-cap segments where lower liquidity could make it harder for brokers to unwind pledged positions during a selloff.

Regulatory attention has already begun

The risks associated with MTF have also attracted regulatory attention. In June, the Securities and Exchange Board of India (Sebi) proposed changes to the framework, including higher net-worth requirements for brokers and wider funding options.

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The proposals were aimed at improving risk management while allowing brokers greater flexibility in financing margin positions.

For investors, leverage can magnify gains when share prices rise, but it can also speed up losses when markets move in the opposite direction.

Kamath has separately cautioned that investors should account for interest, brokerage and taxes when assessing the profitability of margin-funded trades, as these costs raise the level at which an investment needs to be sold to break even.

The warning comes as Zerodha itself grapples with a moderation in trading activity. Kamath said the pace of new customer additions and overall market participation had slowed considerably as the post-pandemic bull market lost momentum.

Zerodha’s latest financial performance also reflects the current situation. The company’s net profit rose about 1% to Rs 4,283 crore in FY26, while brokerage income declined nearly 11% to Rs 2,738 crore. Interest income was also lower at Rs 2,269 crore.

Sign of things to come?

The slowdown follows a much stronger period for the brokerage industry. Zerodha had reported revenue of nearly Rs 10,000 crore and net profit of Rs 5,493 crore in FY24, when retail participation and trading activity were at their post-pandemic peak.

Kamath said Zerodha’s customer assets have nevertheless continued to expand, indicating that clients are retaining their investments with the platform even though trading activity has cooled.

The company’s focus is also shifting towards products such as mutual funds and US investing as it looks for growth beyond its traditional broking business.

The new, contrasting trends underline the challenge facing Zerodha and other brokers: leverage-funded trading can provide a valuable source of income in a subdued market, but the same exposure can become a vulnerability when prices fall rapidly.

With MTF balances continuing to climb, the ability of brokers and investors to manage that leverage could become increasingly important for market stability, Kamath observed.