Zerodha Launches Margin Trading Facility on Kite: Features and Fees Explained

On December 19, 2024, Zerodha introduced the Margin Trading Facility (MTF) on its trading platform, Kite. This new feature enables investors to purchase stocks for delivery using leverage, even if they don’t have the full upfront funds available.

This development marks Zerodha's foray into a facility that is already gaining popularity in the industry, providing users with more flexibility in managing their trades.

How Margin Trading Facility (MTF) Works

To access MTF, users must enable this feature in their Zerodha account. If the account has Power of Attorney (PoA) or Demat Debit and Pledge Instruction (DDPI) enabled, the activation is immediate. If not, the activation process may take up to one day.

To place an MTF order on Kite, users simply select the MTF option in the order window. Once the order is executed, the holdings acquired via MTF are marked with an “M” in the portfolio. Users can track their daily interest charges and margin requirements through the Console MTF statement.

Interest Rate and Borrowing Limit

With the MTF, investors can borrow up to 80% of the trade value, depending on the stock they wish to purchase. The borrowed funds will attract an interest rate of 0.04% per day, which amounts to ₹40 per ₹1 lakh on a daily basis. This allows investors to access significant leverage to make larger investments without needing the full upfront capital.

Costs and Charges Associated with MTF

There are several charges associated with MTF that investors should be aware of:

• Interest Rate: 0.04% per day on borrowed funds.

• Brokerage Charges: 0.03% or ₹20 (whichever is lower) per executed order.

• Pledge Charges: ₹30 + GST per ISIN for pledging, with no charges for unpledging.

• Square-off Charges: ₹50 + GST per squared-off order.

These charges contribute to the overall cost of using MTF and need to be factored into any decision to use the facility.

Risk Considerations for Leveraged Trading

Zerodha has highlighted several risks associated with leveraged trading. While equity delivery trades enable investors to hold stocks over a longer period, leveraged positions incur daily interest charges, which can quickly erode profits if the market moves against the investor. In the event of a decline in stock prices, users are required to either add margin funds or close their positions to avoid further losses.

Why Zerodha Launched MTF Now

Nithin Kamath, Zerodha’s CEO, acknowledged that the company had been hesitant to launch MTF due to concerns about market volatility. Despite these concerns, the growing trend of margin trading in the industry and the increasing contract values in derivatives markets prompted Zerodha to move forward with the launch.

Kamath also noted that offering MTF was essential for Zerodha to stay competitive, especially since the platform was the only major broker not yet providing this feature.

Comparison of MTF with Loan Against Securities (LAS)

Zerodha’s MTF carries a higher interest rate compared to the Loan Against Securities (LAS) product offered through its NBFC, Zerodha Capital. While LAS provides a margin of up to 50% at an interest rate of 11.5%, MTF offers up to 80% margin but at a higher interest rate, due to its higher risk profile.

Conclusion

Zerodha’s introduction of Margin Trading Facility on Kite is a significant move in the brokerage industry, offering investors the ability to make larger trades by borrowing funds. While the facility provides greater flexibility, it also comes with higher costs and risks, especially with daily interest charges. Investors are urged to exercise caution when using leverage and ensure they fully understand the terms and potential consequences of margin trading.