Leveraged stock bets soar with retail confidence

Although robust risk management policies and effective processes are in place to manage this increased leverage, warn higher margins could pose significant challenges if experience a sharp decline.

"The increase in the book is in line with the overall in the market," said Mini Nair, chief financial officer at . "Given a number of new related to stringent margin rules, collateral, etc, in MTF, the risk associated with this product has reduced considerably for both the client and the broker. A surge in MTF carries the risk primarily in the event of a market crash leading to ."

Margin funding, where buy stocks by paying 25% and brokers cover the rest for up to a year, was around ₹25,700 crore at the end of March last year and ₹7,100 crore in February 2020.

ETMarkets.com

The MTF Who's Who

Jio Financial Services leads the table with margin funding of about ₹1,521 crore, while two PSUs, and , have positions funded with borrowed money amounting to ₹1,118 crore and ₹1,102 crore, respectively.

The primary reason for the increase in margin funding is the outperformance of the market, particularly in mid-cap and small-cap stocks, which led to more retail investors purchasing stocks by paying a margin. The Nifty Midcap 100 and Smallcap 100 indices have gained 21% and 23%, respectively, in the last six months, compared with a 13% gain in the Nifty50.

"Regulators over time have built a lot of controls around margin funding. Minimum levels of margin are also stipulated," said Ashish Nanda, head of digital business at Kotak Securities. "Hence, there should be no concern of systemic risks. Investors, however, need to be cautious while taking positions under margin funding. They should only invest if they are confident about the stocks over performance versus the interest rate they are charged."

Many brokers provide MTF facilities for nearly 1,500 stocks. MTF is a financial product that enables investors to leverage brokers' funds for trading in the cash market. Depending on the client's risk profile, brokers levy an interest rate ranging from 7% to 18%.

ICICI Securities charges about ₹ 26 per day for a borrowing of ₹1 lakh. MStock by Mirae Asset provides an MTF option for traders at an interest rate between 6.99% and 9.99%.

The Securities and Exchange Board of India (Sebi) issued a framework on MTF in June 2017, including disclosure rules and eligibility requirements for brokers to provide margin funding to clients.

MTF is collateralised by pledging investors' existing shares. For instance, if an investor holds shares worth ₹10,000 in his demat account, he can take a position of up to ₹40,000. However, investors must maintain a minimum margin in their accounts as per the broker's requirements.