Imagine this scenario – you have discovered your dream home. It comes with a hefty price tag of ₹1 crore, while you currently have only ₹50 lakh in your account. So, what do you do? You go to a bank, secure a home loan for the remaining amount, and successfully purchase the house.

This, essentially, is the premise of Margin Trading Facility or MTF. When you come across a promising investment opportunity but find yourself falling short of funds to fully capitalise on it, MTF comes to your rescue. It empowers you to bridge the financial gap, boosts your buying capacity, and allows you to seize opportunities with the potential for higher returns.

In this blog, we will delve deeper into the features and benefits of MTF, explaining how it can enhance your investment journey.

We will cover:

• What is MTF
• How does MTF work
• Benefits of MTF

What is MTF:

Margin Funding is a facility provided by brokerage firms. It allows investors to borrow funds to purchase additional securities. Only corporate brokers – such as PL – are allowed to offer MTF, as per SEBI guidelines.

MTF is a form of leverage, meaning it enables you to increase your investment capacity without having to put up the full amount from your own pocket or selling shares from your existing portfolio. The additional buying power offered by MTF opens up the potential for generating higher returns on your investments.

To avail MTF, open a Demat & Trading account with PL by clicking here

If you are a PL client, contact your relationship manager to activate Margin Trading Facility in your account.

How does MTF work:

MTF is offered against a SEBI-approved list of shares & securities and comes with a pre-determined interest rate. When using MTF to buy shares, you need to pay only a fraction of the total transaction value upfront. This initial amount is called the “Margin,” and it acts as security or collateral. The margin percentage required can vary based on factors like risk and the current value of your portfolio. The remaining funds for the transaction are loaned to you by the broker, with a pre-determined interest rate that varies depending on the broker.

For example, if you want to buy shares worth ₹1 lakh and the margin required is 20%, you would need to pay ₹20,000 upfront. The broker would provide the remaining ₹80,000 as a loan, and you would be charged interest on this amount for as long as you hold the position.

Two things to note here:

1. As per the SEBI mandate, you need to pledge the shares purchased through MTF if you wish to hold your position. This pledge request must be made before 9 pm on the day of the purchase. Failure to do so may result in the broker selling off the shares within ~4-6 days.
2. During the period of holding, if the margin in your account falls below the minimum maintenance level, then the brokerage will make a ‘Margin Call’. Think of this as a reminder for you to either add more funds or sell some securities to bring the funds back to the required level. Failing to do so may lead to the broker squaring off the position or liquidating the assets to recover the loan. Typically, you can hold on to your position for as long as you maintain the required margin.

When you square off or exit your position, you can generate profit if the return is higher than the interest on the loan. On the contrary, if the stock price has moved down, then you have to bear losses as well as pay interest. MTF can thus magnify both gains and losses, and it is important to understand how it works before proceeding.

By using MTF strategically, you can aim to achieve higher risk-adjusted returns compared to conventional cash-only investments.

Benefits of MTF:

Now that we’ve covered the basics of MTF, let’s explore the key benefits it offers to investors.

• Increase buying power: MTF allows you to leverage your portfolio and increase your overall stock market investment with a relatively small amount of your own money.
• Gain Instant liquidity: By using shares currently held in your portfolio, you can take larger positions in the market.
• Capitalise on short-term opportunities: MTF enables you to benefit from short-term opportunities in the market even without having the required funds to invest.
• Earn higher returns: With MTF, you can take bigger positions, presenting an opportunity to generate higher returns if the trade goes in your favour.
• Improve diversification: Increased funds enable you to diversify your portfolio across various shares and securities. This helps in reducing the investment risk.
• Enjoy lower interest rates: MTF interest rates are generally lower than conventional loans since they are collateral-backed.
• Access to premium securities: MTF can provide access to premium securities that may have higher prices but significant growth potential.
• Get dividends & other corporate benefits: Shareholder benefits such as dividends, bonuses, and rights can be enjoyed on shares purchased through MTF.
• Well-regulated: The Securities & Exchange Board of India (SEBI) and the Exchanges closely monitor the functioning of MTF to ensure secure and fair practices.

Evidently, MTF can be a powerful tool for investors looking to enhance their investment capacity. However, it comes with significant risks and requires a disciplined approach. So, knowledge and preparation are key. If you decide to explore Margin Funding, do so with caution, understanding the potential risks involved.

To minimise the risks, build a well-diversified portfolio across sectors and market caps. Additionally, ensure that your portfolio is regularly evaluated and adjusted by booking profits and setting stop losses.

Remember to seek advice from qualified professionals and carefully assess your financial situation before diving into the world of Margin Funding. PL’s qualified professionals offer research-backed calls and personalised advice to help you make informed decisions.

To access MTF, initiate the process by opening a Demat & Trading account with PL. Click here to get started.

Existing PL clients can activate the Margin Trading Facility in their accounts by reaching out to their dedicated relationship manager.