Zerodha co-founder Nithin Kamath has flagged margin trading funding (MTF) as the single biggest risk facing his brokerage, warning that a sharp correction in Indian equities could trigger a chain reaction of forced selling, similar to what has unfolded in South Korea’s stock market. While he stressed that India’s regulatory framework has helped prevent excessive leverage, Kamath said the rapid growth of MTF over the past few years remains his “biggest nightmare” as a broker.
In a post on X, Kamath said the rapid expansion of Zerodha’s MTF book has become the firm’s largest source of risk since it was founded in 2010. According to him, the concern is not merely the size of the exposure but the composition of the portfolio, particularly the significant allocation to stocks outside the futures and options (F&O) segment.
“My biggest nightmare as a broker is what’s happening in the Korean markets right now. The source of my nightmare is the way our MTF book has been growing along with the industry as a whole. In terms of pure risk, MTF is by far the biggest risk we have taken since we started in 2010,” Kamath wrote.
He said Zerodha currently has an MTF book of around ₹9,000 crore, with at least half of it invested in non-F&O stocks. According to Kamath, this creates an additional layer of risk because many of these stocks can hit lower circuits repeatedly during periods of market stress, preventing investors and brokers from exiting their positions.
Kamath drew parallels with recent developments in South Korea, where a sharp rally in equities encouraged greater use of leverage. As stock prices rise, collateral values also increase, allowing investors to borrow more against their holdings. He noted that this cycle can become increasingly dangerous when combined with derivatives and leveraged exchange-traded funds (ETFs), which tend to magnify both gains and losses.
According to Kamath, the real danger emerges when markets reverse. A relatively small decline can quickly snowball into a much larger selloff as falling collateral values trigger margin calls, forcing investors to liquidate positions. The subsequent unwinding of leveraged ETF positions adds to the selling pressure, creating what he described as a self-reinforcing downward spiral until markets eventually stabilise.
Why Kamath believes India is not immune
Kamath pointed out that margin trading funding has become popular only over the last three to four years, meaning the industry has not yet experienced a major market crash under the current scale of leveraged participation. While Indian equities witnessed extreme volatility during the COVID-19 pandemic, he suggested that the MTF ecosystem was still relatively small at the time compared with today.
He cautioned that even though MTF represents a relatively small proportion of India’s overall market capitalisation, its impact during a sharp correction could be disproportionately large, especially in the small- and mid-cap universe.
“Even though MTF as a percentage of market cap is small, if the Indian markets were to fall sharply, it would cause severe sell-offs across many small- and mid-cap stocks. Brokers today typically provide MTF on ~1,500 stocks,” Kamath said.
The Zerodha founder also highlighted that the widespread availability of MTF across roughly 1,500 stocks increases the potential breadth of any forced liquidation event if market sentiment deteriorates rapidly.
Despite his concerns, Kamath credited the Securities and Exchange Board of India (SEBI) for maintaining tighter regulatory oversight of leverage in the Indian market. He said the regulator’s approach has helped prevent the kind of excessive leverage that has historically contributed to deeper market dislocations in several overseas markets.
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