Zerodha’s Nithin Kamath launches new MTF feature, highlights risk of borrowing money for stock trading

Online brokerage platform Zerodha’s Chief Executive Officer Nithin Kamath on Thursday announced the launch of a new margin trading facility (MTF), which allowed users to buy delivery stocks by borrowing money from brokers.

In a social media post on X, Kamath highlighted his dilemma of launching a feature like MTF at a time of stock market volatility. MTF allows investors to buy stocks by paying a part of the total value. The broker funds the remaining amount and charges interest on this loan.

“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,” said Nithin Kamath in his post. 

Kamath highlighted his concerns over customers ignoring the impact of the cost of borrowing and the risk of the trades going against their bets.

“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,” said Kamath. 

The Zerodha chief addressed how their clients were asking for this feature due to the rise in popularity of the MTF in the last three to four years.

“Considering the number of customers asking us for the feature, it didn’t make business sense for us to not offer it. But yeah, like with everything else, we will never push this to customers and trigger them to trade,” he said in his post.

According to the Zerodha website, the clause depends on the stock for which the leverage is taken. A trader can borrow up to 80 per cent of the trade value at an interest rate of 0.04 per cent per day. 

“Depending on the stock, you can borrow up to 80% of the trade value. An interest rate of 0.04% per day ( ₹40 per lakh per day) is charged on the borrowed funds until the MTF position is active,” as per the MTF rules on Zerodha.

The company also gave a list of stocks for which traders can leverage the money. As the MTF feature is borrowing-oriented, users will have to enable it from their account. If the account is PoA or DDPI enabled, then MTF can be enabled instantly. Otherwise, getting approval to enable the feature will take a day, according to the company website.

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19 Dec 2024, 08:27 PM IST