Margin Trading Facility (MTF) is a financial service that allows you to buy stocks by paying only a portion of the total cost, with the remaining amount funded by your broker. You are charged interest on the borrowed amount, and this service can help you leverage your capital, but it comes with risks and additional costs.
Table of Contents
What is MTF?
MTF is a service that enables you to purchase shares with borrowed funds. You only need to pay a percentage of the total value upfront (known as the margin), while the broker lends you the remaining amount. Interest is charged on the borrowed portion until you sell the shares.
For example, if you have ₹1,000 in your account and the stock price is ₹1,000 per share, MTF allows you to buy 3 shares with your ₹1,000. The broker would fund the remaining ₹2,000 (₹3,000 total value minus ₹1,000 margin), and you would pay interest on the ₹2,000.
Example Scenario
- Stock Price: ₹1,000 per share
- Your Contribution: ₹1,000 (margin)
- Broker’s Contribution: ₹2,000 (borrowed funds)
- Total Value of Shares: ₹3,000 (3 shares)
Interest Calculation:
If you hold the shares for 10 days, the interest charged on the borrowed ₹2,000 would be:
- Daily Interest: ₹2,000 × 0.04% = ₹0.80 per day
- Total Interest for 10 Days: ₹0.80 × 10 = ₹8
So, after 10 days, you’d pay ₹8 as interest for the borrowed amount.
Charges
When using MTF, there are several charges involved:
- Interest: 0.04% per day (₹40 per lakh) on the borrowed funds. This interest is applied starting from T+1 day and continues until the stock is sold.
- Brokerage: 0.03% of the transaction value or ₹20, whichever is lower.
- Pledge Charges: ₹30 + GST per ISIN (International Securities Identification Number) for pledging stocks.
- Square-Off Charges: ₹50 + GST per order if the broker squares off your position to recover the margin.
Eligibility
Not all stocks are eligible for MTF. The broker maintains a list of approved stocks for margin trading, and you can check the list before placing an order.
How to Buy Stocks ?
To use MTF, you need to activate a DDPI (Depository Participant Instruction), which allows the broker to pledge your shares as collateral. Here’s how to buy stocks using MTF:
- Log into your trading account and navigate to the MTF section.
- Place a buy order for the stock you want to purchase, ensuring that the stock is eligible for MTF.
- After placing the order, you will receive a pledge request by 5:30 PM on the same day.
- For the order to be processed, accept the pledge request before 7:00 PM.
- Once the shares are pledged, the broker will fund the remaining amount, and you will be charged interest on the borrowed funds.
Cut-off Time for Pledging Stocks
The cut-off time for pledging your stocks is 7:00 PM on the same day you make the purchase. If you fail to pledge the shares before this time:
- The order will be converted into a Delivery Trade (CNC), meaning you will have to pay the full amount for the shares.
- If you do not have sufficient funds, your account will show a negative balance, and the broker may sell the shares to recover the outstanding amount.
How to Unpledge Stocks
There is no need to manually unpledge MTF stocks. You can directly sell the MTF holdings from your account. However, the sale proceeds will only be available the next day for reinvestment or withdrawal.
How to Identify Holdings
Your MTF holdings will be clearly labeled with an M tag in your trading platform. To exit your MTF position:
- Hover over the stock.
- Click on Options and select Exit to sell the MTF quantity.
Alternatively, you can add the stock to your Marketwatch and exit using the MTF order type.
Margin and Funding Calculations
The margin required for MTF depends on the Value at Risk (VAR) and Exposure Limit Margin (ELM) for the stock.
- For F&O Stocks: Margin is calculated as VAR + 3x ELM.
- For Non-F&O Stocks: Margin is calculated as VAR + 5x ELM.
Example:
For a stock priced at ₹100, with a margin requirement of VAR + 5x ELM (for non-F&O stocks), if the VAR is 5% and the ELM is 4%, the margin required would be:
- Margin = 5% + 5 × 4% = 5% + 20% = 25% of ₹100 = ₹25.
This means with ₹100 in your account, you could buy 4 shares priced at ₹100 each.
How to Check Funds Statement
You can check your MTF funds statement by logging into your account statement or the platform’s console section. The statement will show the details of your margin usage, interest charged, and the funded amount.
What Happens if the Value of Pledged Stock Decreases?
If the value of the pledged stock decreases, the broker will calculate the mark-to-market (MTM) margin on a daily basis. MTM margin is collected only on losing positions. If your stock declines in value, you may be required to deposit additional funds to maintain the margin requirement.
Maximum Funding Allowed
The maximum funding you can avail under MTF is generally ₹50 lakh per account, with a limit of ₹10 lakh per stock.
Can You Do BTST ?
Yes, you can engage in BTST (Buy Today, Sell Tomorrow) trades using MTF. However, interest will be charged on the opening balance from T+1 day.
Corporate Actions on Positions
In case of corporate actions (such as dividends, mergers, or rights issues), MTF positions are closed one day before the ex-date, except for bonus and stock splits.
Taxation and P&L for Trades
Taxation for MTF trades is calculated using the First-In-First-Out (FIFO) method at the demat level. MTF trades are treated like any other delivery trade (CNC) for tax purposes, and a combined P&L (profit and loss) and capital gains statement is generated accordingly.
Who Cannot Invest ?
Currently, certain individuals cannot use, including:
- NRIs
- Minors
- Custodial Participants
Conclusion
MTF offers traders the opportunity to leverage their capital and buy more shares than they could with just their available funds. However, it comes with risks and costs, including interest charges and margin requirements. It’s important to understand how MTF works and the associated fees before using it. Always be mindful of the risks of borrowing to invest, and ensure you monitor your positions carefully. MTF can be a useful tool for experienced traders, but it requires proper risk management to avoid unwanted financial exposure.