MTF trading allows a trader to buy eligible shares by paying a part of the purchase value and the broker finances the rest. This access to borrowed capital can support a trade plan but also creates a daily cost of funding.
Interest continues while the position is funded. Traders need to calculate this cost before placing an order. A well defined cost plan can also help manage margins and plan for an exit.
1. Know What You're Funded For
For example, if a trade is of ₹1,00,000 and required contribution is ₹30,000. Funded amount is ₹70,000. Interest is typically charged on this funded amount.
MTF margin requirements are dependent on category of stock: NSE It may incorporate the calculation of Value at Risk (VaR) and Extreme Loss Margin (ELM). The funded position must also be kept open while the margin required is maintained .
2. Identify Interest Before Trading
The funding cost can be calculated by the following formula:
Interest=funded amountannual interest rateholding days/365
Say 80,000 is funded at 12% a year for 20 days, the interest comes out to something like ₹ 526.
a. Calculate the cost for different holding periods when entering a trade, such as 5, 10 and 20 days. This shows how the interest amount changes if a position stays open.
3. Check the Complete Cost
Interest is just one component of MTF trading costs. Broking, Securities Transaction Tax, Exchange charges, GST, Stamp duty and demat related charges may be applicable.
Plan your trade considering these charges. This gives us a better estimate of the size of the price movement required to offset trading and funding costs.
Don’t view a position thru the prism of its bid and offer prices. Costs can influence the outcome.
4. Track Margin Post Purchase
MTF necessitates continuous margin maintenance. If the value of the funded shares falls then your margin position may be changed.
The NSE rules require a mark-to-market margin if the market value of the funded stock falls below the funded cost. Brokers are also required to keep the margin required on funded open positions.
A daily check can include:
Current Amount of Funding
Margin available
Current stock worth
Interest received
Margin requirement applicable
Regular tracking helps catch a shortfall in margin before it impacts the position.
5. Decide on the Holding Period
The cost of funding is time-related.” As time goes by, and the expected market movement isn’t coming as quickly as planned, the interest grows.
Please create a hold window before ordering. If that period changes recalculate the cost of funding.
For example, a trade that was planned for ten days may remain open for twenty days. Then you should correct the interest calculation with twenty days instead of the original estimate.
This ties the trade plan to current costs.
6. Don’t Max Out Your Available Limit
A broker could set a defined MTF limit, and not necessarily have to use the whole limit in every trade.
It’s a good idea to set aside a portion of the available capital for margin requirements or market price changes. It also allows to follow the real amount funded.
Instead of just looking at the available leverage there should be more focus on the trade value, the amount funded and the cost.
7. USe an MFT Calculator
An important aspect of MTF trading is the cost of funding. Determine the funded amount first and then estimate the interest for the period you want to hold. Inclusive of broking and other charges.
Enter the trade, keep a regular check on the margin, stock value and accrued interest. A MTF calculator can also help keep funding decisions on solid numbers.