Interest Rates in Margin Trading Facility – Decoded

One of the most common queries that most traders would have about using Margin Trading Facility is concerning interest rates for availing the margin benefit provided by the broker. Since Margin Trading Facility works like any regulated and legal financing solution, interest is a mandatory charge that a trader availing of MTF would have to pay when settling the amount lent by the broker.

MTF interest rate usually varies from broker to broker, but the average value stands at somewhere between 0.04% and 0.05% per trading day. It is pivotal to note that MTF interest rate is not a charge that is levied on a monthly basis or basis any other frequency but is in fact charged daily. It must be paid to avail the additional purchasing power afforded by MTF.

Now that this much has been understood, what factors actually determine the interest rate to be charged for availing Margin Trading Facility?

Factors That Affect MTF Interest Rate

1.Base Interest Rates:
Like in any financing solution, the MTF interest rate is determined by the base interest rates as decided by the apex financial institutions as a part of their monetary policy. In this case, the interest rates decided and ratified by the Reserve Bank of India are the basis on which the interest rates for Margin Trading Facility will be calculated by the broker. So, by that rule, if the base interest rates of the country are kept at an affordable level, the interest rate for MTF too would be on a lower range.

2.The Source of Funds:
This refers to the capital that the broker is holding as a reserve for Margin Trading Facility. If the broker or financial services provider is dependent on borrowed capital, it might revise the MTF interest rates to the extent so that it too can settle its financial obligations. On the other hand, if most of the broker’s capital is owned as an asset, and not as a liability, the interest rates for MTF could be significantly lower.

3.Amount Borrowed:
While not necessarily, the interest rate for MTF might be calculated, for some brokers and financial services providers, based on the amount that has been paid by the broker’s end to buy the position. So, if that particular amount is higher, the interest rate too will be on a higher level.

4.Duration of Holding:
This is a simple factor to work out – the longer you hold on to your position, the more interest you will have to pay to ensure that it remains yours. This is why, to a thrifty trader looking to cut off expenses and charges, it is advised to avail of MTF only for short-term trades.

5.Regulatory Revisions:
This is again related to the base interest rates of the country. If there are any new regulations or reforms introduced by SEBI or any of the exchanges, they too can come into play directly into play when a broker sets the interest rate to avail for Margin Trading Facility.

6.Economic Policies:
Again, related to points 1 and 5, economic policies and reforms, on a larger scale, too have a bearing on the MTF interest rate. Moreover, basis the economic conditions at play, MTF interest rates, as in the case of other financing solutions, too can be determined.
By understanding these factors properly, you will be able to decide when to avail of the Margin Trading Facility as per your own financial situation.

How is MTF Interest Rate Calculated?

The following is the standard formula that is used to calculate the MTF Interest Rate:
Daily Interest = Funded Amount x Daily Interest Rate
Daily Interest Rate indicates the Annual Interest Rate divided by 365. To understand how this MTF Interest Rate calculation works, let’s see an illustration of the same:
Imagine that the Funded Amount is ?10,000 and the Annual Interest Rate is 20%.
So, the Daily Interest Rate would be around: (20/365) x 100, which comes up to 5.48%.
Now, applying the formula, we will get the Daily Interest as below:
?10000 x 5.48% = ?548
So, the Daily Interest in this case will be ?548.
Of course, the Annual Interest Rate levied might vary from broker to broker. But these are the lines on which the calculation works.

How MTF Interest Rates Affect You?

You might be mistaken in thinking that MTF interest rate is merely a charge that you have to pay to avail of the advantage of margin for new buying opportunities. But the truth is that the MTF interest that you pay will affect you in quite a few crucial ways.
- MTF Interest Rates can affect the overall profitability of your trades. It is something that gets deducted from your gross profits, significantly reducing the final earnings that are credited in your ledger.
- MTF interest rates also can increase the costs of the trading positions. This is because interest in Margin Trading Facility is calculated on a daily basis. Therefore, the longer you hold on to your positions, the costlier they become for you.
- MTF interest rates also end up aggravating your losses. If your trades have culminated in losses, then you need to not only bear the loss amount but also the accumulated MTF interest.
- Any position is deemed to be profitable based on the net returns earned on it. If MTF interest takes out a whole proportion of the same, then a position’s net returns can be affected adversely.
Thus, it can be concluded that MTF interest rates can be a negative factor that would affect the overall profitability and feasibility of holding on to a position. Therefore, availing MTF at a specific interest rate should be considered and factored from all possible points of view before you go ahead to avail the facility.

The Final Word

There is no doubt that Margin Trading Facility is a useful means to explore new trading opportunities in the market without worrying about funds or finances. It gives a trader a better opportunity to tap into new positions arising in the market without any financial constraints. However, an ill-equipped or inept trader would not be able to avail the leverage to the best of his abilities in buying positions that can yield good returns. On the other hand, if a trader is unable to earn profits from a trading position using Margin Trading Facility, it would be more troublesome since the MTF interest, accumulated over a period of time, would only take away a major chunk of the profits earned in the trade. This is why a trader needs a good level of skill and expertise to avail the facility strategically.

To conclude, Margin Trading Facility is a financing solution for traders that would differ from broker to broker.

Overall, it is advisable for every trader to compare the MTF interest rate offered by each broker as well as the charges and expenses that would be incurred.

By doing this, a trader would know exactly what positions to buy by availing this facility so that the returns that one can earn on the same can be used to pay the interest as well.

It thus goes without saying that MTF is a facility that can only be used strategically with a lot of forethought and wisdom so as to work as an advantage rather than a disadvantage for a trader.