 "trading")
The outstanding margin trading facility (MTF) book of domestic brokerages crossed ₹1 trillion for the first time this month, rising 2.3 times over the past year. At the peak of the Covid crisis in March 2020, the book stood at under ₹3,200 crore. Investors should clearly understand the benefits and drawbacks of this facility before opting for it.
How MTF works
Investors pay part of the transaction value upfront as margin, while the broker funds the rest. “The margin can be put up in the form of cash or approved securities. The purchased shares remain pledged until the loan is repaid,” says Sandip Raichura, chief executive officer (CEO), retail broking and distribution, and director, PL Capital.
MTF is effectively a loan from the broker, available only in the cash segment, to buy stocks or exchange-traded funds (ETFs). The leverage can be up to five times. “Investors with high conviction in a stock but lacking sufficient funds can activate MTF with their broker,” says Ashish Nanda, chief digital business officer, Kotak Securities.
The facility is restricted to select stocks, updated monthly by the exchanges. Trivesh D, chief operating officer, Tradejini, points out that selection depends on liquidity, volatility, and regulatory criteria.
“Group I stocks, as defined by the exchanges based on liquidity and market capitalisation, can be funded under MTF,” says Raichura. Stocks under GSM (graded surveillance measure), ASM (additional surveillance measure), and other restrictions are excluded.
The margin requirement is 25–50 per cent, depending on the stock. “For highly liquid, large-cap stocks, leverage can go up to 4X. For mid-cap and other more volatile stocks, higher margins are required,” says Raichura.
Interest and other costs
Interest charged for MTF can vary considerably. “Rates across brokers range between 9.5 per cent and 18 per cent per annum,” says Nanda. Interest is charged daily for the holding period.
“Larger brokers with stronger financing lines tend to offer more competitive rates,” says Raichura.
Suppose a trader puts up ₹1 lakh and borrows ₹2 lakh at 12 per cent for one month. The interest is ₹2,000. In this case, a profit of ₹30,000 will reduce to ₹28,000 after paying interest, while a loss of ₹30,000 will worsen to ₹32,000.
Investors must also pay brokerage, pledging charges, and GST on interest and services. “Interest charge exceeds all others if a position is held beyond a week,” says Nanda.
Leverage amplifies gains
MTF is seamless. “The entire process of pledging shares and receiving funding is integrated and quick. Users get a consolidated view of positions, limits, and margin calls,” says Devarsh Vakil, head of prime research, HDFC Securities. Getting a personal loan can be more time-consuming and involve paperwork. Users get a consolidated view of positions, available limits, and potential margin calls on their trading platform.
MTF is often cheaper than personal loans and non-banking financial company (NBFC) funding. “The interest rate is lower due to the secured nature of the borrowing,” says Vikas Singhania, CEO, TradeSmart. Vakil adds that interest is charged only on the amount used and for the duration of the holding. Shares can be used as collateral, avoiding separate pledging.
“It is useful in bullish or trending markets for holding quality stocks, for momentum or swing trading strategies to exploit short- to medium-term price moves,” says Singhania.
Losses get magnified
MTF magnifies the downside if the stock moves against the investor.
The main risk is forced liquidation if markets correct sharply. A margin shortfall can trigger automatic selling of pledged stocks. “Such forced squaring off can cause significant losses, even wiping out the user’s capital,” says Vakil.
Holding MTF positions too long erodes profits due to interest costs.
Risk management tips
Before they begin using this facility, traders must learn how it works. “Familiarise yourself with the minimum capital you need to deposit, the minimum equity you must maintain in your account, and the margin you need to pay in the event of a sudden drop,” says Vakil. He stresses the importance of active monitoring, stop-losses, diversification, and picking stocks with strong fundamentals.
“Use MTF only for high-conviction trades and not for speculation,” says Singhania. He also advises monitoring collateral value and being alert to margin calls, while maintaining liquidity for top-ups, especially in volatile periods.
Red flags to watch out for
* Lack of transparency in interest rates, hidden charges
* Aggressive sales push for high leverage without explaining risks
* Absence of real-time margin monitoring, delayed margin call alerts
* Non-standardised or unclear agreement terms
* High haircuts (offering less leverage) on even stable stocks
* Excessive brokerage charges
