- Margin trading in India is increasingly focused on small-cap stocks, which make up 50% of funded amounts
- Large-cap stocks account for 32% and mid-caps 18% of the margin trading facility (MTF) book
- Small and microcaps face liquidity risks when markets fall or move sideways, warns Zerodha founder
India's margin trading activity is increasingly shifting towards smaller companies, with small-cap stocks accounting for half of the industry's funded amount, prompting Zerodha founder Nithin Kamath to flag the liquidity risks investors could face if market conditions deteriorate.
“Most of the growth in the industry's MTF book is in small and microcaps. These are the stocks where liquidity tends to dry up first when markets either fall or go sideways, like they are right now,” Kamath said in a post on X.
Most of the growth in the industry's MTF book is in small and microcaps. These are the stocks where liquidity tends to dry up first when markets either fall or go sideways, like they are right now😬 https://t.co/qH7kJ6O8ut
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— Nithin Kamath (@Nithin0dha) October 9, 2026
The data shared by Kamath shows that small-cap stocks account for 50% of the industry's margin trading facility (MTF) book, compared with 32% for large-cap stocks and 18% for mid-cap stocks. The distribution highlights the growing exposure of leveraged market positions to stocks that can become harder to trade when sentiment weakens.
MTF allows investors to purchase shares by paying a portion of the investment upfront, while their broker funds the remaining amount. Although the facility enables investors to take larger positions with limited upfront capital, it also increases their exposure to market movements.
Liquidity is a key concern in smaller stocks. When markets fall or remain range-bound, trading activity can weaken, making it more difficult for investors to exit positions at desired prices. This can become particularly challenging when leveraged positions need to be reduced during a market downturn.
Kamath's warning comes as markets move through a period of uncertainty, with his comments drawing attention to the changing composition of the industry's funded positions rather than just the direction of benchmark indices.
A more detailed breakdown of the margin book shows that the exposure extends beyond conventional small-cap stocks.
According to the charts, stocks ranked among the top 100 by market capitalisation account for 31% of the MTF book, while ranks 101–250, classified as midcaps, represent 17%.
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Stocks ranked 251–500 contribute 20%, while those ranked 501–750 account for 14%. A further 15% of the funded amount is concentrated in stocks ranked 751 and below in market-cap size, while securities not included in the Association of Mutual Funds in India's (AMFI) classification account for 4%.
The breakdown suggests that a substantial portion of the industry's margin-funded exposure lies outside the largest companies, where liquidity conditions can be more vulnerable to changes in market sentiment.
The charts use National Stock Exchange (NSE) margin trading disclosures at the individual-security level, alongside AMFI's market-cap classifications. The accompanying index comparison uses total-return indices to track the performance of different market-cap segments.
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