In a recent LinkedIn post, Nithin Kamath, the founder and CEO of Zerodha, discusses the increasing use of Margin Trading Facility (MTF) among retail investors and the potential risks associated with it. Kamath highlights a concerning trend of leverage migrating to MTF as other avenues, such as Futures and Options (F&O), have seen regulatory tightening in the post-pandemic period.
The Pro-Cyclical Nature of Leverage
Kamath begins by explaining a fundamental economic principle: leverage tends to be pro-cyclical. This means that as markets trend upwards, the use of leverage also increases. He points out that the period following the COVID-19 pandemic has been characterized by rising markets, which has, in turn, encouraged greater leverage.
“Leverage is pro-cyclical i.e., increase as the markets go up, which has been the case in the post-pandemic period.”
While regulatory measures have successfully reduced leverage within the F&O segment, Kamath observes that a portion of this leverage has simply shifted to alternative instruments, specifically the Margin Trading Facility.
Risks of Margin Trading Facility
According to Nithin Kamath, the popularity of MTF is a relatively recent phenomenon. He expresses concern that many retail customers may not fully grasp the inherent risks involved in using this facility.
“MTF’s popularity is very recent and most retail customers don’t really understand the risks.”
Kamath elaborates on Zerodha’s approach to offering MTF, emphasizing a cautious strategy. Zerodha provides the facility but actively avoids promoting it aggressively or constantly pushing it to customers. This approach underscores the company’s awareness of the potential downsides for uninformed investors.
Understanding MTF Risks
Margin Trading Facility allows investors to buy shares by paying only a portion of the total cost, with the broker lending the remaining amount. While this can amplify potential gains in a rising market, it equally magnifies losses if the market moves against the investor’s position. As Kamath notes, the lack of full understanding among retail customers about these amplified risk-reward dynamics is a significant concern.
The migration of leverage from regulated F&O markets to MTF presents a challenge for both investors and regulators. While MTF can be a useful tool for experienced traders, its growing popularity among less-informed retail participants, as highlighted by Kamath, warrants careful consideration and education.
“While we offer MTF, we do it without being loud about it or constantly pushing it.”
In his post, Nithin Kamath implicitly calls for greater awareness and responsible usage of margin trading facilities. His insights serve as a timely reminder for investors to thoroughly understand the risks before leveraging their positions, especially in a market environment that has historically seen increased leverage during uptrends.
📝 About This Content
This article is based on insights shared by Nithin Kamath on LinkedIn.
📅 Originally posted on May 13, 2026 | View original post on LinkedIn →