How MTF Can Help Investors Maximize Their Returns

Investing has many strategies by which an investor can maximize his returns. One such strategy that has been gaining traction in recent years is the Margin Trading Facility. This essentially enables investors to leverage borrowed funds to enhance their market position and hence their possible returns.

Understanding MTF (Margin Trading Facility)

The MTF or Margin Trading Facility is a brokerage tool that enables investors to borrow funds to trade in stocks or securities. The investor has to maintain a stipulated margin with the broker as collateral for the loan, which varies according to the broker's stipulation and market conditions.

How MTF Works in the Share Market

For a clear understanding of how MTF works in the share market, let's break it down into the following steps.

First Investment: An investor has to deposit a certain percentage of the total trade value as a margin with the broker. For instance, if the investor wants to buy stocks worth ₹1,00,000, and the broker is offering a margin of 50%, the investor will have to pay an upfront ₹50,000.

Leverage: By using MTF, the investor is leveraging the position. He will borrow the other ₹50,000 from the broker to complete the purchase of ₹1,00,000. In effect, this gives the investor far greater control over a larger number of shares than would otherwise be possible with his fund.

Interest and Fees: The broker charges interest on the money borrowed, which would depend on what the broker charges. While this is an added cost, if the trade was good, the returns from the investment should exceed this interest considered as an expense.

Repayment: After selling the stocks, repayment of the borrowed amount along with applicable interest is a must for the investor. If the investment gains value, the profit for the investor could be marginally larger.

Benefits of MTF to the Investors

The margin can be a game changer for those investors looking to maximize returns. Some of the major advantages that come with this margin are as follows:

Increased Buying Power: By far, the biggest advantage of MTF. It increases an investor's buying power. If they borrow from the broker, they can go out and buy a more significant number of shares than they initially could with their own cash. This puts them in a position to act on potential price movements and cogenerate that much bigger profits.

Profitable from Smaller Moves: Small moves in the market can be beneficial when leveraged. Let us say an investor uses MTF to purchase shares worth ₹2,00,000; If they rise by 10%, the profit will amount to ₹20,000, as opposed to ₹10,000, which would have been the profit without MTF.

Diversification: Thanks to the additional capital provided by the broker, investors can also diversify their portfolios and put their funds into different stocks or securities. This diversification minimizes the risk for any one stock and increases overall returns.

Margin Trading in Volatile Markets: MTF will remain handy in times of increased market volatility. Since the investor has huge capital to trade with, he would be in a position to pocket a profit quickly in case of rapid market movements being witnessed during short-term volatility.

Risks of MTF in the Share Market

For all its glitter and appeal, MTF has its downsides in the share market, chief among them being the risk of amplified loss. Simply put, the investor has borrowed funds to invest which must be returned irrespective of whether prices go up or down.

Amplified Losses: Just as MTF enhances profits, it also enhances losses. If the stock price falls, the investors may be left with a position that is worth less than the borrowed sum leading to a loss possibility that exceeds the initial use of margin.

Margin Calls: If the value of the stocks declines below a certain level, a margin call will be given by the broker, demanding that the investor deposit more money into the account to sustain that setting.

Interest Cost: Interest charges to funds borrowed can add up, especially if the investor keeps that position for a long time. These interest payments can eat into all profits generated from the trade; hence, investors must always keep an eye on how long they are holding their leveraged positions.

Conclusion

In strengthening its hand as a potent investment instrument to return the maximum profit in the share market with huge leverage, the MTF has gone ahead to significantly raise the investor's buying power through borrowed funds and thereby build portfolio diversity to soak into market volatility.