MTF product code on Zerodha

MTF (Margin Trading Facility) is a product code on Kite, Zerodha’s trading platform, that enables investors to buy eligible equity shares by paying only a portion of the total transaction value upfront. The remainder is funded by Zerodha as a loan, on which interest accrues daily. The purchased shares serve as collateral for the loan and are held in the investor’s demat account in a pledged state until the MTF position is fully paid for or sold.

MTF is a SEBI-regulated facility and is distinct from intraday leverage. Unlike MIS, which offers intraday leverage with mandatory same-day closure, MTF allows leveraged delivery positions to be carried overnight for extended periods.

Regulatory framework for MTF

The Margin Trading Facility is governed by SEBI under its circular on margin trading, most recently consolidated in the SEBI master circular on stock broker obligations. Key regulatory parameters:

• Maximum leverage: SEBI caps MTF leverage at 4:1 for Group 1 securities (broadly, Nifty 200 and BSE 200 constituents). The trader pays a minimum of 25% of the purchase value; Zerodha funds up to 75%.
• Eligible securities: Only SEBI-approved Group 1 securities (qualifying stocks) are eligible for MTF. The list is periodically updated by exchanges.
• Interest rate: SEBI permits brokers to charge interest on the funded amount. Zerodha’s MTF interest rate (as of 2024) is approximately 0.049% per day, equivalent to roughly 18% per annum. This rate is disclosed on Zerodha’s website and subject to change.
• Broker net worth: Brokers offering MTF must maintain a minimum net worth of Rs 3 crore under SEBI’s framework.

How MTF works on Kite

1. The investor places a buy order on Kite with the MTF product code for an eligible stock.
2. Kite blocks the margin amount (minimum 25% of transaction value) from the investor’s trading account.
3. Zerodha funds the remaining amount (up to 75%) and the full purchase is executed.
4. The purchased shares are credited to the demat account in a pledged state as collateral for the MTF loan.
5. Daily interest accrues on the funded amount. Zerodha debits interest periodically (usually monthly or upon position closure).
6. The investor can close the MTF position at any time by selling the shares (proceeds repay the loan) or by paying the funded amount directly to convert the position to a regular delivery holding.

Eligible instruments

MTF is available only for equity shares listed on NSE and BSE that appear on the SEBI/exchange-approved Group 1 eligible securities list. As of 2024, this typically covers Nifty 200 constituent stocks and their BSE equivalents. F&O, currency, commodities, and mutual funds are not eligible for MTF.

Interest cost

The daily interest cost is the key economic consideration for MTF positions. For a position held for multiple weeks or months, interest can significantly erode profits.

Example: An investor buys Rs 1,00,000 worth of shares using MTF, paying Rs 25,000 from their account and borrowing Rs 75,000 from Zerodha. At 0.049% per day, the daily interest on Rs 75,000 is approximately Rs 36.75. Over 30 days, the interest cost is approximately Rs 1,102.50.

If the stock price rises 1% (from Rs 1,00,000 to Rs 1,01,000), the gross profit is Rs 1,000 on the investor’s Rs 25,000 of own capital, a 4% return. However, after 30 days of interest (Rs 1,102), the net position is a loss of Rs 102 despite the stock rising 1%.

MTF is therefore suitable for shorter holding periods where the anticipated price appreciation significantly exceeds the interest cost.

MTF versus CNC and MIS

Margin call and forced liquidation

If the market value of the MTF-funded shares falls below the required margin threshold, Zerodha will issue a margin call. If the investor does not top up the margin by the specified deadline, Zerodha may liquidate the MTF position to recover the outstanding loan. This is similar to a margin call in futures trading.

The maintenance margin for MTF positions is set by Zerodha in line with SEBI’s guidelines. A significant decline in the stock price can trigger forced liquidation, locking in losses for the investor.

Converting MTF to CNC

An investor can convert an MTF position to a regular CNC delivery position by paying the funded amount (the loan) directly to Zerodha. Once the full amount is paid, the pledge on the shares is released and the shares are available as unencumbered delivery holdings.

Conversely, an existing CNC position cannot be retrospectively converted to MTF; MTF must be selected at the time of the initial purchase order.

MTF pledge and additional borrowing

Shares held in MTF can also be used to generate additional collateral margin for F&O trading, by creating a second-level pledge through the depository. This allows an investor to simultaneously use MTF-funded equity as margin for options strategies, though this creates a complex collateral chain that requires careful monitoring.

Common mistakes and edge cases

Ignoring interest accumulation. Investors who treat MTF like a perpetual leverage facility and hold positions for months accumulate substantial interest charges. An 18% annualised interest rate is higher than many fixed deposit rates and must be offset by stock appreciation before the position is profitable.

MTF on volatile stocks. Using 4x leverage on a highly volatile small-cap stock magnifies both gains and losses. A 10% adverse move wipes out a 40% portion of the investor’s own capital before interest.

Margin call during a flash crash. A sudden intraday crash can cause MTF positions to breach maintenance margin during the session, triggering intraday liquidation at depressed prices. Investors should maintain buffer margin above the minimum requirement.

Corporate action adjustment. Dividends, bonuses, and splits on MTF-held shares are handled similarly to regular delivery shares, but the ex-date price adjustment affects the pledged collateral value. Zerodha adjusts MTF calculations accordingly, but investors should monitor their collateral value around ex-dates.

Not all stocks are eligible. A trader who attempts to place an MTF order on a stock not on the Group 1 list will have the order rejected. Kite displays eligible stocks in the MTF filter, but the list updates periodically.

Regulatory context

MTF is regulated under SEBI’s master circular on margin trading for brokers (SEBI/HO/MIRSD/2020 series). The circular specifies the minimum margin rate, eligible securities, maximum funded amount, disclosure requirements, and broker net worth obligations. Exchanges are required to maintain and publish the list of Group 1 eligible securities. SEBI has periodically amended the MTF framework to include additional safeguards for retail investors, including mandatory disclosure of the interest rate and the maximum duration for which the broker will fund the position.

References

1. SEBI circular on margin trading facility, SEBI/HO/MIRSD/2020 series.
2. Zerodha support article: “What is MTF?”, support.zerodha.com.
3. NSE circular on Group 1 securities for MTF, NSE/MEM/2020 series.
4. Zerodha MTF interest rates and charges, zerodha.com/charges.
5. SEBI master circular on stock brokers and sub-brokers, SEBI/HO/MRD/2023.