Zerodha Launches Margin Trading Facility, But Nithin Kamath Flags Caution
Zerodha will 'never push' customers towards MTF, Nithin Kamath said, adding that those who trade for delivery tend to ignore the impact of the cost of borrowing.
Discount broker Zerodha on Thursday announced the launch of margin trading facility on its platform, but the company's co-founder Nithin Kamath flagged caution in a post on social media.
"I don't know if it is a good time with the fall in the markets, but we are finally launching MTF (margin trading facility) which allows you to buy stocks for delivery by borrowing money from us," Kamath posted on X.
MTF allows investors to pay only a portion of the amount while purchasing stocks. The balance is paid by the brokerage, and an interest is charged on the same till the amount is repaid.
Zerodha will be charging an interest of 0.04% per day on the funds borrowed under the MTF framework. The interest will be applicable from the T+1 day till the stocks are sold.
How MTF Works
For instance, an investor buys three shares of a company worth Rs 1,000 each. This takes the total trading amount to Rs 3,000. However, the investor pays only Rs 1,000 and borrows the remaining Rs 2,000 under the MTF.
On this borrowed amount, the brokerage charges interest per day. Zerodha, as announced in a release, will levy an interest at the rate of 0.04% per day. Such an interest, on Rs 2,000, will take the per day interest to Rs 0.8.
If the borrowed amount (Rs 2,000 in this example) is returned after 10 days, then the overall interest required to be paid adds up to Rs 8.
Notably, the margin trading facility is allowed only on select-stocks. Under the current rules, MTF is available for stocks and exchange traded funds listed in the group-I category, which is updated monthly by the stock exchanges based on criteria like impact cost. Currently, around 2,000 securities are part of this group, the NSE and the BSE said in a release last month.
Kamath Flags Caution
Kamath, on X, said the MTF has been launched due to the request made by several customers seeking this feature. However, he said he "will never push this to customers".
"I haven't been sure about this product for a long time because of obvious reasons. Customers who trade for delivery tend to ignore the impact of the cost of borrowing, and there's always the risk of the trade going against them, which leads to a bigger loss," he explained.
However, over the last three to four years, MTF has "grown tremendously", with most trading platforms offering it, Kamath pointed out. Considering the number of customers asking us for the feature, "it didn't make business sense for us to not offer it", he added.
However, Zerodha "will never push this to customers and trigger them to trade", he noted.
Notably, the launch of MTF by Zerodha was announced on the same day when Paytm Money launched its "Pay Later" facility. Pay Later is a margin trading facility, valid till Mar. 31, 2025, which lets traders access about 1,000 MTF-enabled stocks with an interest rate of 1% per month, the company noted.
