Margin on liquid funds by pledging on Zerodha

Overview

Pledging liquid funds on Zerodha turns cash you have parked in a liquid or overnight debt fund into collateral margin for futures and options, without your having to sell the fund or lose its return. The key advantage over pledging ordinary shares is that liquid funds are treated as cash-equivalent collateral, so the margin they generate is usable in full and, crucially, counts toward the 50% cash portion that Zerodha requires for every overnight F&O position.

That single feature is why traders who hold surplus cash increasingly keep it in a liquid fund and pledge it, rather than leave it idle in the trading account or pledge stocks against it. This article explains what margin on liquid funds means, why liquid and overnight funds behave as cash equivalents under the 50:50 cash-collateral rule , what haircut applies, how to pledge them, what it costs, and how selling or releasing the collateral works. For the mechanics that sit underneath, see margin pledge mechanics on Zerodha and pledge and collateral margin on Zerodha .

What margin on liquid funds means

When you pledge a security you continue to own it, but Zerodha credits a trading margin against its value. That credit is called collateral margin, and it is added to your total Kite margin and shown separately under the Funds tab. It is computed from the security’s previous closing value, less a haircut. The same applies to a liquid fund: pledge units you already hold, and their post-haircut value appears as collateral you can trade with.

A liquid fund is a debt mutual fund that invests in very short-dated instruments, so its price is stable and its returns are steady. An overnight fund is even shorter dated. Both fall into the family Zerodha calls cash-equivalent collateral, alongside liquid exchange-traded funds such as Liquid BeES , Zerodha’s own LIQUIDCASE , and government securities. You can pledge liquid mutual funds held through Zerodha Coin , and liquid ETFs held as demat units, provided the specific instrument is on the approved list.

Collateral margin from any pledged holding can be used for equity intraday trades, for trading futures, and for writing or shorting options. It cannot be used to buy stocks or ETFs for delivery. Buying options is a special case that is allowed but carries a financing cost, covered in buying options using collateral margin .

Why liquid funds are cash-equivalent collateral

The heart of the matter is the 50:50 rule. SEBI requires that at least half the margin for an overnight F&O position be met in cash or cash-equivalent collateral, with the other half met from non-cash collateral such as pledged stocks. In practice this means that if a position needs a margin of Rs 1 lakh, you must have at least Rs 50,000 in cash or cash equivalents; pledged stock alone cannot fund the whole requirement.

This is where liquid funds earn their keep. Collateral from cash-component securities, which includes liquid funds, overnight funds, Liquid BeES and government securities, is usable in full and satisfies the cash leg. Collateral from non-cash securities, meaning ordinary stocks, can meet only up to 50% of the requirement. So a trader who pledges Rs 1 lakh of stock still needs a separate Rs 50,000 of cash or cash equivalents to run a Rs 1 lakh overnight position, whereas a trader who pledges Rs 1 lakh of liquid funds has already covered the cash leg. The distinction between the two buckets is set out in cash component versus collateral component .

The penalty for getting this wrong makes the point sharper. Using non-cash collateral beyond the 50% limit creates a cash shortfall, and the shortfall attracts a delayed-payment charge of 0.035% per day, which works out to 12.775% a year, plus 18% GST. From 1 April 2026, if the cash shortfall on an account exceeds Rs 5 lakh, the brokerage on F&O orders rises to Rs 40 per order from Rs 20 instead of that charge. Holding the cash leg in a liquid fund earns a return while avoiding both outcomes, which is the whole appeal. How the shortfall arises and how to manage it is explained in how to use collateral margin for F&O .

A worked comparison: stock versus liquid fund

The value of the cash-equivalent status is easiest to see side by side. Suppose you want to run an overnight F&O position that needs Rs 1,00,000 of margin, and you have Rs 1,00,000 to deploy.

If you pledge Rs 1,00,000 of ordinary stock, the collateral is non-cash. After a haircut it might give, say, Rs 90,000 of collateral, but that collateral can fund only up to 50% of the requirement. So it can contribute at most Rs 50,000 toward the Rs 1,00,000 position, and you still need a separate Rs 50,000 of cash or cash equivalents to complete the margin. The pledged stock alone cannot carry the trade.

If instead you pledge Rs 1,00,000 of a liquid fund, the collateral is cash-equivalent. After its much smaller haircut it might give around Rs 95,000, and every rupee of that counts toward the cash leg. The same Rs 1,00,000, held in the right instrument, comes far closer to funding the whole position on its own, and it earns a return while it sits there. That is the practical reason liquid funds are the default home for the cash portion of a margin book. The percentages here are illustrative, since the real haircut depends on the instrument and the day, but the direction is always the same: cash-equivalent collateral stretches further for overnight positions than non-cash collateral of the same rupee value.

The haircut on liquid and overnight funds

A haircut is a percentage deducted from a security’s value to arrive at its collateral margin. It is a risk buffer, not a fee: no money leaves your account, and your units keep their full value. The concept is covered in full in the Zerodha pledge haircut explained .

Because liquid and overnight funds barely move in price, their haircut is small compared with an equity stock, but it is not zero. The exact figure for any given fund is published, next to its collateral value, on Zerodha’s approved-securities list at zerodha.com/approved-securities. That list is set by the Clearing Corporation and is revised over time, so it is the only reliable place to read the current number. Do not carry a fixed percentage in your head for a named fund; look it up before you pledge. As an illustration of the arithmetic only, a 5% haircut on Rs 1,00,000 of a liquid fund would give Rs 95,000 of collateral margin, but the real figure depends on the instrument and the day.

The reason the haircut stays small is the same reason these funds count as cash-equivalent: their price is stable and they are easy to value and sell, so the cushion the Clearing Corporation needs is thin. The Value at Risk framework that drives haircuts assigns the lowest buffers to the least volatile instruments, which is exactly what a liquid fund is.

What the collateral can and cannot be used for

Collateral margin from pledged liquid funds behaves like any other collateral margin once credited, with the cash-equivalent advantage described above. You can deploy it for equity intraday, futures, and option writing. You cannot use it to buy delivery stock, and it does not add to your withdrawable balance, so pledged-fund collateral cannot be transferred out to your bank.

Two further limits are worth noting. If an F&O account stays in a negative balance for five consecutive trading days, collateral margin cannot be used from the sixth trading day until the account is regularised. And using collateral to buy options, while permitted, is treated as an overnight amount funded by Zerodha and attracts a delayed-payment charge of 0.05% per day, or 18% a year, on the amount used, which needs a positive cash balance to run. These are financing costs on how you use the margin, separate from the haircut on how it was valued.

How to pledge liquid funds for margin

The pledge request is placed from Console, and the flow is the same as for pledging holdings for margin and pledging mutual funds for margin . In outline:

1. Open Console, go to the Portfolio and then Pledge section, and select the liquid fund or liquid ETF units you want to pledge. You can include up to 50 holdings in a single pledge request; submit another request once the first is processed.
2. Enter the quantity and submit the request. Securities can be pledged between 8 AM and 5 PM on trading days.
3. Authorise the pledge on the CDSL portal using your TPIN and the OTP sent to your registered phone and email, unless you have given a POA or DDPI. This depository consent step is set out in how to authorise a pledge on CDSL . Pending pledge requests cannot be cancelled, and units already in a pending, success or overdue status for the day cannot be re-pledged the same day.
4. Once processed, the collateral margin appears under the Funds tab and can be verified through how to verify collateral details .

On timing, stock and ETF collateral usually reflects within a few minutes; Zerodha cites a window of roughly 5 to 15 minutes depending on the instrument. Collateral from liquid mutual funds pledged through Coin can take until the next trading day to appear, so pledge ahead of when you need the margin rather than at the moment you want to place a trade. Only settled units can be pledged; under the current settlement cycle a fresh purchase is available to pledge from the next trading day once it has settled.

Charges: Rs 30 per ISIN, free to unpledge

Pledging costs a flat Rs 30 plus 18% GST per request, per ISIN, regardless of the quantity you pledge, which works out to about Rs 35.40 per ISIN. Pledging the same fund again on a separate day incurs the charge again, so it is cheaper to pledge in one request than to drip-feed. Unpledging is free. The full breakdown, including the point that there is no unpledge charge, is on the Zerodha pledge charges page .

Set against the return a liquid fund earns while pledged and the delayed-payment charge it helps you avoid, the one-time pledge fee is usually a rounding error for a trader running overnight positions.

Selling and unpledging liquid-fund collateral

There is one operational difference from pledged stocks that catches people out. Ordinary pledged stocks can be sold instantly with a normal CNC order, and they auto-unpledge on sale. Liquid funds and liquid ETFs such as Liquid BeES cannot be instant-sold while pledged. To realise them you first place an unpledge request in Console; the units then move to your free holdings the next day, after which you can redeem the fund or sell the ETF. Mutual-fund redemption proceeds are credited to your primary bank account, not to the trading account.

The unpledge timeline follows the standard rule: an unpledge request placed before 3:30 PM makes the units available the following day, and a request after 3:30 PM makes them available the day after. There are no charges and no restrictions on unpledging, covered in how to unpledge holdings on Zerodha . Remember that unpledging removes that collateral, so if you are running positions against it, release only what you can afford to give up, or the account can fall into a shortfall and positions may be squared off.

Liquid funds versus other cash-equivalent collateral

Liquid mutual funds are one of several cash-equivalent routes, and each has a slightly different profile. Liquid ETFs such as Liquid BeES and Zerodha’s LIQUIDCASE trade like a stock and their collateral tends to credit faster, but they still cannot be instant-sold while pledged. Government securities and Sovereign Gold Bonds also count as cash-equivalent once credited and listed. Ordinary equity, by contrast, is non-cash collateral and does not help the cash leg at all. If your aim is specifically to satisfy the 50:50 requirement while earning a return on idle cash, a liquid or overnight fund is usually the simplest fit. What you cannot do is pledge a bank fixed deposit for this purpose, as explained in can you pledge a bank FD for margin on Zerodha .

For the wider question of which instruments qualify at all, see securities eligible for pledging on Zerodha , and for using pledged mutual funds specifically as F&O collateral, how to use mutual funds as F&O collateral . The narrower Kite field explainer is at collateral liquid funds on Kite .

See also

• Liquid BeES and Liquidcase as collateral on Zerodha
• LIQUIDCASE as collateral on Zerodha
• The 50:50 cash-collateral rule
• Cash component versus collateral component
• Zerodha pledge haircut explained
• Securities eligible for pledging on Zerodha
• Pledge and collateral margin on Zerodha
• Margin pledge mechanics on Zerodha
• How to pledge holdings for margin
• How to pledge mutual funds for margin
• How to authorise a pledge on CDSL
• How to unpledge holdings on Zerodha
• Pledge and unpledge charges at Zerodha
• How to use collateral margin for F&O
• How to use mutual funds as F&O collateral
• Buying options using collateral margin
• Can you pledge a bank FD for margin on Zerodha
• Collateral liquid funds on Kite
• Liquid mutual funds
• Overnight mutual funds
• Zerodha Coin
• Value at Risk margin on Zerodha
• How to verify collateral details
• Zerodha Console
• Kite

External references

• Zerodha Support: will Zerodha provide margin on liquid funds?
• Zerodha approved securities list
• Zerodha Support: pledging for collateral margin
• SEBI

References

1. Zerodha Support, margin on liquid funds and the 50:50 cash-collateral requirement, support.zerodha.com (accessed 1 July 2026).
2. Zerodha Support, what pledging is, charges and how collateral margin is computed, support.zerodha.com (accessed 1 July 2026).
3. Zerodha, approved securities and per-security haircut list, zerodha.com/approved-securities (accessed 1 July 2026).
4. SEBI Circular SEBI/HO/MIRSD/DOP/CIR/P/2020/171, “Margin obligations to be met by way of pledge / re-pledge in the Depository System”, 9 September 2020.

Conflict-of-interest disclosure. This article is published by the WebNotes Editorial Team for informational purposes and is written independently. WebNotes operates a Zerodha account-opening referral programme, disclosed on the pages that carry the referral link; this page does not carry it and earns no referral commission from the mechanics described here.