Margin Trading Facility (MTF) is an increasingly popular service offered by Indian brokers that allows investors to purchase stocks by paying only a fraction of the cost upfront, with the remaining amount being borrowed from the broker. In essence, this lets you trade on leverage, where you can trade with more money than you actually have, allowing you to take advantage of market opportunities without worrying about capital.
The MTF Stock List is the list of eligible securities that brokers allow under this facility. Since MTF allows lending and leverage, only selected stocks, which are usually the most liquid and stable “Group-A” stocks, are part of this list. This helps both brokers and investors manage risk better while offering access to more buying power.
What is Margin Trading Facility (MTF)?
In essence, MTF is a facility that is offered by brokers to allow investors to purchase stocks by paying only a portion of the cost, usually around 20% to 50%, with the remaining amount being borrowed from the broker. After the purchase, the stocks are used as collateral and are pledged to the broker, and the investor has to pay interest on the borrowed amount until the position is closed. The stocks are owned by the investor in their Demat account, but they are pledged to the broker until the borrowed amount is repaid.
Compared to other derivative products such as futures and options, MTF provides moderate leverage (usually 2x-4x or higher), which is relatively less risky compared to high multiple derivative investments.
Unlike intraday trading, where you close all your positions on the same day, MTF allows you to hold positions for a longer period of time, sometimes up to a year or more, if you maintain margins and pay interest.
How MTF Works – A Step-by-Step Guide
- Eligibility and MTF Stock List
The MTF Stock List is maintained by brokers, which is a list of eligible stocks that are approved for margin funding. Only stocks that are liquid, volatile, and meet regulatory requirements are eligible for the MTF Stock List.
- Placing an MTF Trade
When you place an MTF trade using your broker’s trading application or platform, you need to select “MTF” as the product type. You need to pay the initial margin, and the broker will fund the rest.
- Pledging Shares
After the trade is executed, you need to pledge the purchased shares as collateral (if required). Some brokers automate this process, so you don’t need to manually pledge via CDSL or NSDL links.
- Interest Calculation
The interest is charged only on the borrowed amount and not on the margin provided by you. This interest is calculated on a daily basis from the date of settlement (T+1) until you sell the shares or close the position.
- Holding and Exit
You can hold the MTF position for an extended period as long as you have sufficient margins
and pay the interest accrued. When you want to sell the shares, the first thing that happens is that the borrowed amount and the interest are paid, and the rest is credited back to your trading account.
Interest Rates & Leverage – Real-World Examples
The interest rate is the only cost incurred while using the Margin Trading Facility in India. Unlike intraday leverage, which is zero-interest, the interest rate on MTF varies depending on the broker and the amount borrowed. The brokers provide annual interest rates between 9% and 18%, with daily interest rates of 0.03% to 0.05% on the financed amount.
Examples:
- Some brokers provide interest rates as low as 9.65% per annum, with a leverage of up to 4x on eligible stocks.
- Other brokers may charge an interest rate of 18% per annum, depending on the funding slab.
- The Leverage option usually falls in a range from 2x up to 4x, depending on your margin, although greater options are available depending on the stock and your exchange profile.
Benefits & Risks of MTF
Benefits:
- Higher leverage means higher potential returns with lower capital outlay.
- You can hold delivery positions, not just intraday positions.
- You only pay interest on the borrowed amount, and leverage can result in higher potential returns in a favourable market.
Risks:
- Interest charges can eat into your profits if you hold long positions.
- Margin calls and forced liquidation at unfavourable prices.
- Not all stocks are eligible, that is, you trade only from the MTF Stock List.
Conclusion
The Margin Trading Facility in India provides a simple solution that helps in increasing buying power and getting actively involved in the stock market without investing a lot of capital. Understanding how leverage works, where interest arises, and which shares qualify is essential in investing in the stock market in a proper manner.
FAQs
- What’s the difference between MTF and regular buying?
Using Margin Trading Facility (MTF), you need to pay only a fraction of the stock’s price, while the broker undertakes to make up the rest. Under normal delivery trades, you need to make payments right away.
- How is interest charged on MTF?
Daily interest is incurred on the amount broker-funded, and it starts accruing from the settlement day (T+1) until the position is closed. Bill settlement occurs over intervals, either weekly or monthly, as per broker terms.
- Can I choose any stock for the MTF?
Not quite. An MTF is limited to those stocks included on the broker’s approved MTF Stock List that contain liquid, SEBI-approved stocks.
