Groww Vs Zerodha: Taking Stock Of The Investment Tech Giants

The exponential rise of investment tech platforms like Zerodha and Groww in the last few years has proven but one thing — there was immense headroom for innovation and disruption in the Indian stockbroking arena, which the legacy players took a while to realise.

Nevertheless, the damage was done and retail investors, both young and old, flocked to these platforms in hordes for reasons galore — ease of trade, user experience, fee, convenience, word of mouth, and we have barely scratched the surface here.

It is also worth mentioning that the Covid-19 pandemic gave a booster shot to the two investment tech unicorns, as a great tide of new users embarked on the stock market route to make riches when the Indian economy was trying to recover after multiple lockdowns.

Interestingly, new-age retail investors have since been embroiled in the Zerodha Vs Groww debate, which we intend to conclude in this article today.  

However, before we delve deeper into the discussion, it is imperative to note that the two platforms command 40% of the stockbroking market share in terms of active users in India, as per NSE data.

It’s All About Numbers… Or Is It? 

An early bird in the Indian investment tech space, Zerodha (incorporated in 2010) checks every box essential for being one of the biggest stock brokers in the country. Moreover, it currently holds a 20% share of the NSE’s total trading volume.

Notably, towards the fag end of September this year, the Zerodha CEO, Nithin Kamath, took to Twitter (now X) to announce that the firm was valued at INR 30,000 Cr, or about $3.6 Bn.

In the same week, the Bengaluru-based fintech unicorn reported that its total revenue for the financial year ended March 31, 2023, crossed the INR 7,000 Cr mark. The bootstrapped unicorn’s net profit during the period under review stood at INR 2,907 Cr, up 39% YoY, largely on the back of strong growth in business and other key metrics. 

 Meanwhile, the Tiger Global-backed fintech unicorn, Groww, surpassed Zerodha in terms of active investors at the end of September 2023. As per the National Stock Exchange (NSE) data, Groww had 6.63 Mn active investors at the end of September 2023 as against Zerodha’s 6.48 Mn.

Notably, any individual who trades even once on the platform is an active user of these platforms. And if one goes by this logic, then Groww has already dethroned Zerodha, and we all can now stop reading this article and go back to running our daily errands. But there’s a catch. The metric has too many moving parts. 

Nevertheless, Groww’s active user base of 6.6 Mn against Zerodha’s 6.4 Mn may not look much, but the rate at which the former has been able to increase its users from 4.1 Mn in FY22 to 6.6 Mn in FY23 is quite a progress. On the contrary, Zerodha’s user base slipped from 6.5 Mn in FY22 to 6.4 Mn in FY23.

As per NSE data, Zerodha had 3.4 Mn customers in March 2021, whereas Groww had 0.78 Mn. Zerodha’s user base has only doubled, growing at a steady pace and even stagnating over the last couple of years, Groww saw its customer base surge by an impressive 750%.

Importantly, Groww ventured into stock trading as recently as 2020. Before that, it operated solely as a mutual fund distribution platform. Furthermore, its expansion into loans and consumer payments didn’t happen until this year.

Moving on, just like its bootstrapped opponent, Groww, too, is profitable. However, the profitability was only achieved in FY23 as revenue from operations tripled to INR 1,227.8 Cr. The startup posted an FY23 net profit of INR 448.7 Cr against a net loss of INR 239 Cr a fiscal ago. 

The Battle For Passive Investors Is On, But Why?

The double whammy of global macroeconomic headwinds and improving fixed deposit (FD) rates has particularly led to the highest-ever exit of active retail investors from the public markets in the recent past.

In FY23 and FY24 (so far), retail participation has been paltry compared to FY21 and FY22. On the NSE, the share of retail investors against the total trading turnover dropped from 45% in FY21 to 36.5% in FY23. Similarly, the number of active retail investors fell from 11.7 Mn in January 2022 to 8 Mn in March 2023.

Further, cumulative net outflows (people selling stocks or ditching intra-day trade) in April and May 2023 were the highest in the last seven years.

This is the reason why a lot of companies, which earlier did not see much participation from passive investors, have now started launching passive funds, and Zerodha and Groww are no exceptions.

Zerodha, which relies on active retail investors for 90% of the company’s total revenues, announced the launch of two passive mutual funds, Zerodha Nifty LargeMidcap 250 Index Fund and Zerodha ELSS Tax Saver Nifty LargeMidcap 250 Index Fund, last month.

A passive mutual fund comes at a lower expense ratio compared to an active mutual fund but doesn’t guarantee as much returns to the fund investors as an active one. Kamath highlighted the same by stating that Zerodha will be a passive only AMC to avoid the conflict of promoting what generates higher income (active funds). By focussing only on index products, we can hopefully help spread the idea of passive funds in India, Kamath said while announcing Zerodha’s two AMCs.

This is ofcourse a distant approach from what Zerodha has been focussing on for the past decade

The funds were launched under Zerodha Fund House, an asset management company (AMC), which it formed in a joint venture with Sequoia-backed smallcase.

Similarly, in September, Groww received approval from SEBI to launch its first index fund, Groww Nifty Total Market Index Fund, paving the way for its entry into the mutual fund space. Earlier this year, Groww acquired the mutual fund business of Indiabulls Housing Finance for INR 175.6 Cr.

In a report, ratings firm ICRA highlighted that Groww generated 80% of its revenues from F&O trading in FY23.

According to market experts, at a time when F&O traders are bleeding losses, with a SEBI report suggesting that 90% of these investors faced losses, passive trading will continue to be the norm for some time.

As per Motilal Oswal Financial Services, retail AUM in Exchange Traded Funds/passive funds stood at INR 9,700 Cr in FY23, growing at a CAGR of 56% since FY19. This growth has been driven by a thrust from online distributors. 

Additionally, the share of ETFs in total retail AUM is a meagre 2%, which means the market is ripe for disruption. 

Traditionally, stock brokers steered away from passive funds because of lower commissions, fees and less return on investments.

“A reason why the retail investors will turn to passive funds offered by discount brokers is that the space is dominated by AMCs or banks, which charge a heavy broking fee and maintenance charges. This upsets individual investors. However, discount brokers like Zerodha and Groww take minimal to zilch maintenance charges,” said a Bengaluru-based analyst.

On the other hand, Zerodha and Groww will move towards passive funds whose performance typically depends on how indexes perform, in order to bring down their operational expenses, the analyst added. 

Calling A Spade A Spade: Groww’s Active Users Not Enough To Crush Zerodha

According to industry experts, the increase in the number of Groww’s active users may not give it an edge over Zerodha. This is sheer because of the strong technology stack and the trader community-driven approach Nithin Kamath-led firm has built since its inception.

A report by HDFC Securities mentions that Zerodha has an overall customer base of 12 Mn users, of which 6.5 Mn are active users. Further, of the total active users, 2.5 Mn are F&O traders.

The research states that nearly 50% of the 2.5 Mn F&O traders at Zerodha are sticky, semi-professional, and place strategy-based trades. In addition, the top 35% of customers account for 70% of Zerodha’s revenues. 

The bottom 50% of the F&O traders meanwhile churned within the last year, as per the report.

This is what Nithin Kamath said in a blog post earlier that a small community of very active intra-day and F&O traders are maximising the revenues for discount brokers.

Additionally, Zerodha has various offerings. Its products like the Kite app for active traders and Coin for passive mutual fund investors have given the investment tech platform the leverage to target niche audiences.

“Zerodha believes that the user base of the two apps is diverse and needs to be targeted separately. While the typical user of Coin is a passive investor in MFs and does not want to be bothered with regular market updates, the Kite app is targeted at a customer who needs regular stock or trading-related notifications. Passive products such as Ditto Insurance are likely to be launched on the Coin app,” according to an HDFC Securities analysis.

Meanwhile, Sonam Srivastava, the founder and CEO of Wright Research points out that the kind of tech products that Zerodha has developed for its users are unparalleled in the stockbroking industry.

“It is a completely evolved technological infrastructure. The algo solutions, urgent alerts for entry/exits to the active retail investors (intra day/F&O), the varied products and its B2B product Kite Connect which offers other fintech platforms access to Zerodha’s products, technology, and user stickiness has worked tremendously in favour of this firm,” Srivastava said.

Zerodha still has a share of 20% of the overall trading volumes in India, almost 70% higher than Groww, which is a huge gap to close for the latter, Srivastava added.

The Nithin Kamath-led stockbroking firm has also doubled down on its education channel resources to tap the growing pool of investors. 

Zerodha’s Varsity (its education-based platform) claims to run on zero-profit education initiatives — from helping novice investors to offering skill-based certifications to serious traders. Also, Kamath recently launched a new YouTube channel, Zing, to target the growing number of young investors.

However, analysts believe that this is Zerodha’s attempt to counter the huge marketing push of the closest rival, Groww, which has been leveraging content/influencer marketing over the past several years to tap young investors.

It is imperative to mention here that Groww, too, is focussed on spreading financial awareness. Under its “Ab India Karega Invest” initiative, the startup organises financial awareness sessions. Moreover, it also publishes newsletters centred around financial news and education, besides creating videos in different languages.

Groww Needs To Grow Its Offerings

According to a July 2023 report published by ICRA Ratings, Groww needs to diversify its income stream, as a sizeable share of its FY23 broking revenues is from futures and options (F&O) broking (over 80% of the broking income). 

“Going forward, Nextbillion Technology’s ability to maintain the momentum of client additions while improving its revenues and profitability and maintaining comfortable capitalisation would remain critical from a credit perspective,” the report stated.

Currently, Groww doesn’t charge annual account opening and maintenance charges from its users like Zerodha, which as per analysts draws new and young customers to the platform. However, much still depends on how Groww builds products to ensure customer stickiness. 

“Millions of users opening new accounts with Groww will not ensure monetisation unless the platform can sell any of its products to these users. The conversion would matter for which Groww will have to experiment with diverse product offerings,” a veteran investor said.

Notably, Groww’s revenues mainly come from charging brokerage fees of up to INR 20 per buy/sell order.

Zerodha & Groww: Comparing Apples And Oranges?

Despite the recent buzz around Zerodha and Groww competing in terms of user growth and increasing revenues, experts in the industry believe that Groww still has a significant journey ahead in capturing a highly monetisable user base similar to Zerodha.

At the same time, keeping the marketing expenses in check will be a challenge for Groww, which has largely ignored community-based organic growth like Zerodha.  

The CEO of FinEdge Harsh Gahlaut said that comparing the two investment tech platforms is like comparing apples and oranges.

“Groww has used the money it raised to rack up numbers on client acquisition at any cost. It rode the boom of first-time users for both stocks as well as mutual funds over the last 3-4 years and that has helped it surpass Zerodha on the number of ‘subscribers’. If this is the only metric then clearly Groww is the winner,” he added. 

 Gahlaut also noted that Zerodha currently has no competition. “The broking industry has serious challenges of revenue sustenance. This is because most traders can have a very short span on the markets. This problem is even more with first-time users… and Groww has a significant number of such clients,” he noted.

Meanwhile, Vivek Banka, the cofounder of fintech startup GoalTeller is of the view reliance on VC money and operating in highly volatile markets put it at a disadvantage compared to Zerodha, which is bootstrapped.

“The pace of user growth will stagnate at some point. Stockbroking is kind of cyclical as when a recession hits, sooner or later, there can be degrowth in the active user base. The true test of businesses is during such times and companies with heavy PE/VC funding will be in a fix,” Banka added. 

It cannot be denied that the Kamath brothers-led startup has stood the test of time, gone through various market cycles and is sitting on a loyalist userbase. 

Zerodha maintains a dominant position in the market, despite the growing competition from its closest rivals such as Groww, Angel One, and even HDFC Bank.

This may clarify why Zerodha stands out as the sole discount broker that imposes an annual account maintenance fee of over INR 300, while other platforms do not levy such charges.

Be that as it may, Groww is yet to reach the maturity that Zerodha is in charge of today. A mere rise in active users does not put it ahead of Zerodha in the race. 

While one cannot deny that Groww offers more comfort to novice investors than any other platform in the stockbroking market, this is hardly any insurance for their stickiness. 

For the platform to have a more sustainable user base, more market cycles will have to forge their journeys. And finally, in terms of user sustainability and diversification, it’s quite likely that Groww may face substantial headwinds going ahead.

Update | 8th November, 1:00 IST

Note: The story has been updated to include the info on the year in which Groww ventured into the stock trading segment and its education initiatives.