Synopsis

Zerodha founder Nithin Kamath warned that small and microcap stocks account for a substantial share of India’s margin trading facility book. He highlighted liquidity risks during market downturns, when smaller stocks may face sharper selling pressure.

Nithin Kamath, founder of Zerodha, has highlighted the growing concentration of India’s margin trading facility (MTF) book in small-cap stocks, pointing to the liquidity risks these stocks face when markets fall or move sideways.

In a post on X, Kamath shared charts showing the distribution of the industry’s funded amount across stocks classified by market capitalization. According to the data, small-cap stocks account for around 50% of the funded amount, while large-cap stocks make up 32% and mid-cap stocks account for 18%.

The charts classify stocks based on Association of Mutual Funds in India (AMFI) market-cap rankings, with large-cap stocks ranked 1–100, mid-cap stocks ranked 101–250 and small-cap stocks ranked 251 onwards.

Kamath pointed to the liquidity risks associated with smaller companies, observing that liquidity tends to dry up first in these stocks when markets decline or move sideways, as they are currently doing.

“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,” Posted Kamath.

A second set of charts compared the performance of market-cap-based indices with the distribution of the MTF book across different stock categories. The data showed that stocks ranked 1–100 accounted for 31% of the book, while mid-cap stocks ranked 101–250 made up 17%.

Small-cap stocks ranked 251–500 accounted for 20% of the book, while micro-cap stocks ranked 501–750 represented 14%. Stocks ranked 751 and above accounted for another 15%, while stocks not on AMFI’s list made up 4%.

The charts highlight the extent of the industry’s funded exposure to smaller stocks, where liquidity can become a concern when market conditions weaken.

The data is based on NSE margin trading disclosures at the individual-security level and AMFI’s market-cap classifications. The index performance chart uses total-return indices.

Disclosure: This article has been written by Kumar Gaurav, who is not a Sebi-registered Research Analyst or an Investment Adviser. Gaurav and their ‘relative(s)’ (as defined under Section 2(77) of the Companies Act, 2013) do not hold any financial interest in the companies mentioned in this article as of the date of publication. The views/recommendations mentioned in this article, wherever applicable, are those of the respective Sebi-registered Research Analyst/brokerage and have been reproduced/reported with due attribution. They should not be construed as the views or recommendations of The Economic Times Digital or the journalist. Readers are advised to consider the original research report and make their investment decisions based on their own assessment. Brokerage disclaimers here

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