How to pledge mutual funds for margin on Zerodha

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Mutual fund units held in demat form in your Zerodha demat account can be pledged as collateral to generate margin for trading in Futures and Options (F&O), equity intraday, and commodity segments on Zerodha’s Kite platform. This is a SEBI-permitted mechanism that allows investors to use their mutual fund corpus as trading margin without redeeming the units.

Prerequisites

  • An active Zerodha trading and demat account with complete KYC and F&O segment activated.
  • Mutual fund units in your Coin CDSL demat account (not SOA-folio units).
  • CDSL TPIN or access to CDSL-registered mobile for OTP.
  • Understanding that ELSS units in lock-in period cannot be pledged.
  • TOTP authenticator for Zerodha two-factor login.

Regulatory framework for pledging mutual funds as margin

SEBI Circular SEBI/HO/MRD/DRNP/CIR/P/2020/218 (October 2020) overhauled the margin pledge framework for brokers and clients. Key provisions:

  • Clients must pledge securities (including mutual fund units) in favour of the Trading Member (Zerodha), who then re-pledges them to the clearing corporation (NSE Clearing or BSE Clearing). This is a two-step process.
  • The pledge creates a lien on the units in the depository (CDSL). The units remain in the client’s demat account but are encumbered.
  • SEBI requires brokers to re-pledge client securities to the clearing corporation the same day as the client pledge. Zerodha cannot use client pledged securities for its own purposes.
  • 50% cash margin rule (SEBI Circular SEBI/HO/MRD/MRD-PoD-1/P/CIR/2021/585): A minimum of 50% of the required margin must be in cash or cash equivalents (funds in the trading account or liquid fund units). Collateral margin from pledged non-cash securities (including equity mutual fund units) can satisfy a maximum of 50% of the required margin.

Eligible mutual fund units for pledge

Not all mutual fund units are eligible for pledge as collateral margin. Eligibility depends on SEBI and exchange-level approved securities lists. Generally:

  • Liquid funds and overnight funds: Eligible; typically approved by NSE/BSE with low haircuts (2%–10%).
  • Debt funds (short duration, low duration): Generally eligible with moderate haircuts.
  • Equity index funds (Nifty 50 based): Often eligible with higher haircuts (15%–25%).
  • Actively managed equity funds: Eligibility varies by scheme; some are approved, some are not.
  • ELSS units in lock-in: Not eligible for pledge during the lock-in period.
  • Credit risk funds, international funds: May not be eligible or may carry very high haircuts.

The approved list and haircut percentages are set by NSE Clearing and BSE Clearing and are subject to periodic revision. Check Zerodha’s pledge interface for the current list of eligible mutual fund schemes.

What is a haircut

A haircut is the percentage reduction applied to the market value of the pledged security to determine its collateral value. It accounts for price volatility and liquidation risk:

  • Example: 100 units of a Nifty 50 index fund at NAV Rs 100 = market value Rs 10,000. With a 15% haircut, collateral value = Rs 8,500.

Higher-volatility securities carry higher haircuts. Liquid funds carry the lowest haircuts.

Step-by-step procedure

Step 1: Verify units are in CDSL demat

Log in to Zerodha Console (console.zerodha.com) and go to Portfolio > Holdings to confirm the mutual fund units are in your demat account. Only units listed here can be pledged.

SOA-folio units (external funds shown in Coin’s External Funds section) are not eligible. They must first be converted to demat form via the Demat Conversion Request (DCR) process. See How to import existing mutual funds into Coin.

Step 2: Log in to Zerodha Console

Navigate to console.zerodha.com. Enter your Zerodha client ID, password, and TOTP.

Step 3: Navigate to the Pledge section

In Console, go to Portfolio > Pledge or Funds > Add Collateral (the exact menu label may vary with Console UI updates). Alternatively, access the pledge option via Kite > Funds > Add Collateral.

The pledge interface shows:

  • All demat-held securities eligible for pledge.
  • Current market value of each security.
  • Haircut applicable to each security.
  • Collateral value after haircut.

Step 4: Select the mutual fund units to pledge

From the list of eligible securities, select the mutual fund scheme you wish to pledge. Enter the number of units to pledge.

The interface shows the estimated collateral margin you will receive after the haircut is applied. Review this to confirm it meets your trading margin requirement.

Note: You can pledge partial units; you do not need to pledge all units in a holding.

Step 5: Submit pledge request

Click Pledge. Zerodha sends a pledge creation request to CDSL for the specified units.

Step 6: Authorise pledge on CDSL

CDSL sends an authorisation request to the client (you) to approve the pledge. This appears as:

  • A notification in the CDSL EASI portal (easi.cdsl.com), or
  • An OTP sent to your CDSL-registered mobile (for TPIN-based authorisation).

Approve the pledge using your CDSL TPIN or by entering the CDSL OTP. This is the same authorisation mechanism as for redemptions.

The pledge authorisation creates a lien on the specified units in favour of Zerodha’s clearing member account at CDSL.

Step 7: Re-pledge by Zerodha to clearing corporation

After you authorise the pledge, Zerodha re-pledges the units to the clearing corporation (NSE Clearing or BSE Clearing) on the same business day. The collateral margin is credited to your trading account on Kite.

Step 8: Verify collateral margin

Log in to Kite. Go to Funds. The available margin shows:

  • Cash margin (funds added via UPI or net banking)
  • Collateral margin (from pledged securities after haircut)
  • Total available margin

Use the collateral margin for eligible trading positions in F&O, equity intraday, or commodity segments.

Cash component requirement

Per SEBI’s 50% cash margin rule: if your total required margin is Rs 1,00,000, at least Rs 50,000 must be in cash margin (added via Kite > Funds > Add Funds). The remaining Rs 50,000 can be met through collateral margin from pledged securities.

Attempting to use collateral margin beyond 50% of the total required margin results in a margin shortfall, which Zerodha will flag and may result in position squaring.

Unpledging units

When you no longer need the collateral margin:

  1. Close the trading positions using the collateral margin, or ensure your cash margin is sufficient to replace it.
  2. Go to Console > Portfolio > Pledge or Funds > Reduce Collateral.
  3. Select the units to unpledge and enter the quantity.
  4. Submit the unpledge request. Zerodha removes the re-pledge from the clearing corporation.
  5. Authorise the unpledge via CDSL TPIN or OTP. The lien is released.
  6. The units are fully available for redemption, switching, or new pledges.

Unpledging typically takes one business day (T+1) to reflect in your Holdings as fully available units.

Pledge invocation (forced sale)

If your trading losses cause the total margin to fall below the required maintenance margin and you do not add sufficient cash or close positions, Zerodha may invoke (invoke = foreclose) the pledge. Invocation means Zerodha redeems the pledged mutual fund units to recover the margin shortfall. This is a forced redemption at the prevailing NAV, which may be unfavourable.

Avoid pledge invocation by monitoring margin levels closely and adding cash margin proactively when positions are under stress.

See also: Zerodha mutual fund pledge documentation

Zerodha Mutual Fund Pledge provides detailed information on Zerodha’s pledge product terms, eligibility list updates, and clearing corporation haircut schedules.

What can go wrong

Units not in demat: SOA-folio units cannot be pledged. Convert them to demat first.

ELSS in lock-in: ELSS units cannot be pledged during the 3-year lock-in period.

CDSL TPIN not set or OTP to wrong mobile: The pledge cannot be authorised without CDSL access. Set up TPIN at cdsl.com.

Fund not on approved list: Some mutual fund schemes are not approved as eligible collateral by the exchange. The Coin pledge interface will not show them as pledgeable.

50% cash rule margin shortfall: Using more than 50% collateral triggers a shortfall. Keep adequate cash margin.

Pledge invocation during market stress: During high-volatility periods, NAV can fall sharply. If the collateral value drops below the required margin simultaneously, the risk of invocation increases.

References

  1. SEBI Circular SEBI/HO/MRD/DRNP/CIR/P/2020/218 dated 6 November 2020 – Pledging of securities with the broker for margin purposes.
  2. SEBI Circular SEBI/HO/MRD/MRD-PoD-1/P/CIR/2021/585 dated 10 June 2021 – 50% cash component requirement for margin.
  3. SEBI (Mutual Funds) Regulations, 1996.
  4. CDSL Operating Instructions on pledge and re-pledge.
  5. NSE Clearing – Eligible securities for margin collateral (updated list on nsccl.co.in).
  6. Zerodha Coin and Kite support documentation (support.zerodha.com).

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