Using MTF? Keep sufficient cash for margin calls, avoid forced selling

Investors should restrict margin trading facility use to liquid stocks, maintain adequate cash buffers for margin calls, and avoid excessive leverage during periods of market stress

Amid the recent stock market carnage in Korea, Zerodha’s co-founder and chief executive officer (CEO), Nithin Kamath, warned that rapidly expanding margin trading facility (MTF) books in India could aggravate a market correction through margin calls and forced selling. He specifically highlighted the risks in non-derivative, midcap and smallcap stocks, which may hit repeated lower circuits and become difficult to exit.

 

Rapid growth in MTF

 

India’s MTF book stood at about ₹1.42 trillion in early August 2026. MTF has gained significant popularity over the past three to four years. The book stood at ₹24,920 crore in FY23. “It has grown between five and six times in about three years,” says Shrey Jain, chief executive officer (CEO), InCred Money Broking.

 

“Higher retail participation, an increase in the number of brokers offering this facility, and greater awareness of the product have driven its adoption,” says Tejas Khoday, co-founder and CEO, FYERS.

 

India’s MTF book, however, remains modest by global standards. “The US margin debt exceeds $1.5 trillion (about ₹142.83 trillion),” says Khoday.

 

How MTF works

 

Under MTF, the investor pays part of the purchase value while the broker funds the balance. “The investor may have to provide a margin of about 25 per cent or more, depending on the stock,” says Jain.

 

The shares purchased through MTF are pledged as collateral. The broker charges daily interest on the funded amount until the investor repays it or sells the shares.

 

Exposure to more for less

 

MTF enables investors to take delivery of shares without paying the entire purchase value upfront. “It provides a way to use leverage in the cash market rather than through derivatives,” says Khoday.

 

Investors can take larger positions in high-conviction ideas without liquidating their other holdings. “MTF can be obtained faster than a loan against securities through a bank or non-banking financial company,” says Jain.

 

Margin shortfall and liquidation risks

 

MTF magnifies both gains and losses. Any fall in the stock price results in a substantially larger loss of the investor’s capital. “The impact depends on the stock and the margin prescribed by the broker,” says Trivesh D, chief operating officer (COO), Tradejini.

 

A fall in the value of funded securities may cause a margin shortfall. “The broker’s risk-management framework determines the additional margin required,” says Trivesh.

 

Investors must provide additional margin within the stipulated period (usually at short notice). “Brokers may liquidate positions if investors fail to meet the margin shortfall,” says Trivesh.

 

Brokers may also charge penal interest if an investor fails to meet payment obligations within the specified timeline. Penal interest rates vary across brokers. “Brokers disclose the applicable penal interest rate in their MTF policies and agreements,” says Trivesh.

 

Greater risk in non-F&O stocks

 

Smallcap and midcap stocks generally become more volatile during stressful times in the market. Sharp price movements can quickly erode an investor’s available margin.

 

“Stocks outside the futures and options (F&O) segment tend to be relatively less liquid during periods of market stress,” says Trivesh. Brokers generally apply more conservative funding norms to these stocks to protect against such risks.

 

During market corrections, these stocks (especially smallcaps) may also hit the lower circuit. “This can prevent investors from exiting their positions,” says Trivesh.

 

Break-even point rises

 

MTF comes with a variety of costs. “The principal cost is the interest charged on the broker-funded amount,” says Vikas Singhania, CEO, TradeSmart.

 

Brokers calculate interest daily until the funded amount is repaid or the shares are sold. Investors must also factor in brokerage, statutory charges, pledge-related charges and possible margin-shortfall charges.

 

Sometimes investors remain in MTF after the share price has fallen, waiting for a recovery, or they may lack sufficient cash to take full delivery. “Interest continues to accumulate during an extended holding period, raising the break-even point,” says Singhania. In case of a stock price correction, the higher break-even point makes recovery more difficult.

 

Who should use MTF?

 

Experienced investors taking short-term positions in liquid stocks may use MTF. “They should use MTF only for high-conviction positions,” says Singhania. Only those with adequate liquidity to manage a drawdown should use this facility.

 

New investors, those with uncertain cash flows, and investors who cannot arrange funds at short notice should avoid MTF. “Remember that forced liquidation turns a temporary decline into a permanent loss,” says Singhania. Those with a long holding period should also steer clear of this funding mechanism.

 

Precautions to exercise

 

Go for only as much leverage as you can handle. “MTF works best when investors use leverage selectively,” says Khoday.

 

Diversify your MTF exposure. Under no circumstance should you concentrate it in just a couple of counters. Use the MTF facility with liquid stocks. “This allows the broker to sell positions more readily after a margin shortfall. Poor liquidity can deepen losses when a broker liquidates a position,” says Jain. In particular, he warns against taking concentrated exposure to illiquid stocks. Maintain an adequate cash buffer to meet margin calls.

 

Before using the facility, understand your broker’s margin call and liquidation policies. Finally, do not treat MTF as free additional capital. “It is essentially debt that is callable,” says Jain. 

 

 

MTF rules you should be aware of

• Sebi permits MTF only in eligible Group I shares and equity exchange-traded funds
• It prescribes upfront margin and maintenance margin based on the risk of each security
• Brokers must collect mark-to-market losses
• They may liquidate positions when margin shortfalls are not met
• Funded shares must be held through a pledge mechanism
• Broker-level funding, broker indebtedness, and client-wise exposure are all capped
• Sebi does not prescribe a single leverage multiple for every stock
• Effective leverage depends on the prescribed margin for the security
• Brokers may impose stricter limits through their risk policies