What is MTF (Margin Trading Facility) – Meaning and Charges

Ever felt limited by your capital while eyeing a high-potential trade? What if there were a way to stretch your purchasing power without waiting for your next paycheck to hit your trading account? 

In the fast-moving world of the stock market, traders are increasingly turning to opportunities that allow them to do more with less, and one such opportunity is the Margin Trading Facility (MTF). 

In this article, we break down what is MTF in the stock market, how it works, and why it has become such a game-changer for retail traders and investors looking to boost their market exposure. 

What is MTF in Stock Market

Margin Trading Facility (MTF) is a strategic investment tool that enables investors to enhance their buying power by borrowing funds from their broker. Under this facility, the investor contributes a portion of the capital, while the remaining amount is financed by the broker.

How Margin Trading Facility Works

Margin Trading Facility allows investors to buy more stocks than they could afford with their own money by borrowing funds from the broker. Furthermore,  the investor contributes a margin, i.e., a percentage of the total trade value, and the broker lends the rest and holds the purchased securities as collateral for the loan borrowed. 

What’s crucial to note here is that if the value of the investment rises, the investor benefits from larger gains since the exposure is higher than their capital. In contrast, if the price drops, losses can be magnified. 

Before understanding this concept with the help of an example, we need to keep in mind that the margin or the percentage of the total trade volume will vary from different brokers. 

For example, with 5x MTF with Rupeezy, you can buy Rs 10,00,000 worth of shares by paying only Rs 2,00,000 (20%), while Rupeezy funds Rs 8,00,000 (80%) at low interest. 

SEBI MTF Rules and Guidelines

The Securities and Exchange Board of India (SEBI) guidelines for Margin Trading Facility include the following key points. 

1) Eligibility for Stock Brokers

Only corporate stock brokers with a net worth of at least Rs 3 Crore can offer margin trading. This financial requirement is set by SEBI to ensure that it can handle the risks involved. 

2) Eligible Securities for MTF

MTF is available to equity shares, which are categorised under ‘Group 1 Securities’ as per SEBI Master Circular 2016.

3) Margin Requirement

To avail MTF, the initial margin required shall be as under:

4) Initial Margin Payment

Investors must make their initial margin payment in the form of cash, cash equivalent, or Group I equity shares, with appropriate haircut as specified in the SEBI Master Circular 2016.

5) Stock Broker Conditions

• Brokers cannot mix the client’s own shares used as collateral with the shares bought using margin funds. 

• Collateral and funded stocks must be marked to market daily. 

• If the shares used as collateral go up in value, the broker may allow the client to borrow more, subject to haircuts.

• However,  no such exposure shall be permitted on the increased value of Funded stocks.

6) Margin Maintenance: 

Throughout the margin trading period, the broker must ensure that the client maintains the specified margin. If the margin falls below the requirement, then the broker must make a margin call, demanding that the client deposit more funds.

7) Exchange/Broker Discretion

Based on their risk assessment, the stock exchange or broker has the right to impose a higher margin than the minimum required.

8) Liquidation of Securities

The broker must clearly state in the ‘Rights and Obligations Document’ the specific situations where they can sell the client’s securities. This typically happens if the client fails to meet a margin call. Importantly, the broker cannot liquidate the client’s securities for any reason other than those specified. 

The points stated above are some of the major key points derived from SEBI Circular 2017.

MTF Interest Rate, Charges, and Calculation

The MTF interest rate charged by Rupeezy is either 10.99% per annum or 0.03% per day. Below, we added a table that explains the MTF charges at Rupeezy.

Now, let us understand how MTF charges are calculated with the help of an example. 

Suppose an investor uses a Margin Trading Facility to buy shares worth Rs 1,00,000 and holds the position for 10 days. Based on the charges provided above, the total MTF charges will be as follows:

a) Interest charges: 

Interest per day = 0.03% of Rs 1,00,000 = Rs 30

Interest for 10 days = Rs 30 x 10 days = Rs 300

b) Brokerage charges:

On buying = 0.2% of Rs 1,00,000 = Rs 200

On selling (assuming same value) = 0.2% of Rs 1,00,000 = Rs 200

So by adding interest charges and brokerage charges, for a Rs 1,00,000 trade held for 10 days under MTF, the investor pays Rs 700 as total MTF charges. 

But you don’t need to do this manual calculation. Simply use the Rupeezy MTF Calculator to easily calculate charges, just select the stock you want to trade and enter buy quantity, holding period, and expected return.

Benefits of Using Margin Trading Facility

Margin Trading is not just about borrowing money, but it is also about unlocking the smart ways to invest, which potentially boosts your buying power and helps you grab the market opportunities. Let us look at some of the key benefits of using MTF in your trading journey. 

1) Buying Power

MTF allows investors to have better purchasing power by opening them up to better and larger market opportunities. It also improves the profits that they earn with MTF rather than the profits that they could have earned with their capital alone. 

2) Flexibility

Margin Trading Facility allows its investors to purchase stocks even when they do not have sufficient cash in hand to execute larger transactions. Unlike regular investing, where you need the full amount upfront, MTF allows you to borrow and invest quickly, which helps you act fast on short-term market opportunities without missing out on the opportunity due to limited liquidity. 

3) High-Value Stocks

Margin Trading Facility allows investors to buy expensive and high-quality stocks that they may not be able to afford with their limited capital. This means that the investors will find opportunities to own shares of leading companies by using only a fraction of the actual stock value. 

Risks Involved in MTF

While MTF can amplify profits, it also carries significant risks that traders must understand before diving into this facility. Now, let us look at some of the major risks that are involved while using the Margin Trading Facility.

1) Maximise Losses

One major risk that every investor takes while benefiting from MTF is the magnified losses that they may suffer in the future. Just as using borrowed money can significantly increase your potential profits in trading, it can also drastically increase your potential losses. 

2) Minimal Balance

The brokerage account that you use for margin trading will have a required minimum balance that you must maintain. If the account balance falls below this minimum threshold due to the drop in your investments, then you’ll receive a ‘Margin Call’ from your broker. This means that your broker may sell some of your assets or may ask you to deposit more funds as per the required level. 

Who Should Use MTF

Margin Trading Facility is best suited for experienced and active investors who are looking to increase their market exposure through additional capital. These investors typically have a solid understanding of market volatility and are comfortable managing leveraged positions.

MTF is particularly ideal for investors who can closely monitor their portfolios, respond swiftly to market movements, and maintain the financial discipline required to meet margin calls promptly.

However, MTF is not recommended for beginners or conservative investors. The use of leverage can amplify both gains and losses, making it a high-risk strategy for those with limited market experience or a lower risk appetite.

How to Avail MTF

To avail of a Margin Trading Facility, follow these simple steps that are mentioned below:

Step 1: Open a demat account with Rupeezy. 

Step 2: Choose an MTF stock from the Rupeezy App or website to proceed with your margin trade. These are the stocks eligible for the Margin Trading Facility.

Step 3: Initiate your purchase by tapping the buy button and then choosing the MTF option under the same.

Step 4: Set the quantity by entering the number of shares you wish to purchase under MTF.

Step 5: Pay less and trade more, where you only invest 20% into the MTF stocks while Rupeezy covers up to 80%. 

Step 6: Relax and track your MTF portfolio under the ‘Positions’ section in the app or website, which helps you track your leveraged trades, outstanding margins, and performance, without mixing them up with your regular holdings. 

MTF vs MIS

Margin Trading Facility (MTF) and Margin Intraday Square-off (MIS) are two different margin trading options offered by brokers in the stock market with various distinct features. Let us understand these two concepts by knowing their differences, which are stated below:

Conclusion

Margin Trading Facility (MTF) can be a powerful tool for investors seeking higher returns through leverage. However, with greater potential comes greater risk. Henceforth, it is important to fully understand the costs, responsibilities, and risks involved before opting for it. 

When used wisely, MTF can complement your trading strategy, where it offers enhanced flexibility and access to high-value stocks, but it demands discipline and awareness too!

FAQs

Q1. What is MTF full form?

The full form of MTF is Margin Trading Facility. 

Q2. Is MTF good or bad?

MTF helps investors boost their buying power and earn from short-term price moves using borrowed funds. While it can increase returns, it also increases risk. So, MTF is best suited for experienced traders, not beginners or those with low risk tolerance. 

Q3. Can I sell MTF shares on the same day?

Yes, you can sell MTF shares on the same day by square off or by exiting MTF positions within the same trading day. 

Q4. How long can I hold MTF shares?

You can hold your MTF stocks for as long as your broker’s policy allows. Currently, Rupeezy allows stock holding in MTF for an unlimited period. 

Q5. How much does MTF cost per day?

Rupeezy charges a daily interest rate of 0.03% and a brokerage fee of 0.2% on MTF.