What is the Rate of Interest Charged on Margin Trading Facility?

Last Updated on March 13, 2024 by ethinos

Margin Trading Facility (MTF) has become increasingly popular among investors in India, offering the opportunity to leverage their investments and potentially amplify their gains. If you, too, are considering entering the world of MTF, then it’s important for you to understand the rates and how much interest is charged per day on this facility. 

Let us further examine the concept of MTF interest rates and provide you with a clear understanding of how much interest is charged on MTF per day.

Understanding MTF Interest Rates

Margin trading grants you the power to expand your trading capacity by borrowing funds from your broker. The MTF interest rate is the price associated with this borrowing, calculated based on the margin rate – which signifies the percentage of the trade value that you need to provide as collateral.

MTF interest rates are set by respective brokers. The dynamic nature of the market, prevailing economic conditions, and the broker’s risk management strategies are just some of the factors that affect the eventual rate. Often, the goal is to find an equilibrium between offering competitive rates and fostering responsible trading practices.

How to Calculate Interest on Margin?

MTF interest rates are typically applied on a daily basis, computed as a percentage of the borrowed amount. This implies that the quantum of interest charges is directly linked to the borrowed sum. While the specific interest rate varies, it is imperative to note that MTF interest rates generally exceed standard bank loan rates due to the heightened risk inherent in margin trading.

Calculating the interest on margin becomes relatively straightforward once you’ve grasped the formula and gathered the necessary information. This interest computation hinges on three pivotal factors: the margin used, the margin trading interest rate, and the duration for which the margin is held. The formula for interest on margin computation is as follows:

Interest on Margin = (Margin Used × Margin Trading Interest Rate × Time Period) / 365

Here’s a breakdown of the components:

• Margin Used: This denotes the sum of the margin borrowed from your broker.

• Margin Trading Interest Rate: It signifies the annualised interest rate levied by the broker on the borrowed funds.

• Time Period: Refers to the number of days throughout which the margin remains active.

Crucially, the time period is typically expressed in days and then divided by 365, thereby transforming the interest rate into a daily rate. However, it’s worth noting that certain brokers might opt for a 360-day divisor instead of 365 for this calculation.

Illustrating the Calculation with an Example: To further enhance your understanding, let’s consider an example. Imagine you borrow ₹75,000 on margin from your broker, and the margin trading interest rate is 10% per annum. If you decide to retain this position for 25 days, the calculation proceeds as follows:

Interest on Margin = (₹75,000 × 0.10 × 25) / 365 = ₹205.48

In this instance, you would be required to remit ₹205.48 as interest on the margin, after holding the position for a span of 25 days.

It’s important to understand that the interest rate imposed can exhibit variations based on the broker you’re engaged with and the specific financial instruments you’re trading. Thus, it’s advisable to maintain regular communication with your broker to glean the most current and accurate information pertaining to interest rates and associated charges.

Also Read: The Pros and Cons of Margin Trading

Exploring the Benefits of MTF with BFSL

Opting for margin trading through BFSL unfolds a range of benefits meticulously designed to enrich your trading experience:

• Documentation-Free: BFSL simplifies the process by negating the need for extensive documentation while availing MTF.

• User-Friendly Platform: BFSL’s platform offers effortless access, ensuring a seamless margin trading experience.

• Generous MTF Limits: BFSL extends substantial MTF limits, encompassing amounts up to ₹90 crores, thereby offering significant leverage.

• Competitive Interest Rates: BFSL takes pride in providing some of the most competitive MTF interest rates, thereby ensuring a cost-effective trading endeavour.

• Amplified Leverage: Traders can bask in the luxury of enjoying up to 4 times leverage on both cash and shares, thereby augmenting the trading potential.

• Call & Trade Support: The provision of call and trade support further enhances the trading journey by offering additional assistance.

• Personalised Relationship Manager: BFSL assigns a dedicated relationship manager to cater to your needs, thereby ensuring a personalised and tailored assistance experience.

BFSL’s MTF Interest Rate Variants

BFSL’s approach to MTF interest rates is exemplified by its three distinctive MTF interest rate variants, all of which are some of the lowest in the Indian market:

• Freedom Pack: This plan offers an MTF interest rate of 18% per annum.

• Professional Pack: This category extends an MTF interest rate of 12.5% per annum. 

• Bajaj Privilege Club: This alluring choice provides an MTF interest rate of merely 9.75% per annum.

Strategies to Mitigate MTF Interest Costs: 

While MTF interest rates are a non-negotiable aspect of margin trading, employing certain strategies can help mitigate their impact on your overall profitability. Consider the following tips:

• Strategic Trading: Approach position selection for margin trading with caution. Prioritise trades with lower risk profiles to mitigate potential substantial losses.

• Ongoing Vigilance: Maintain a vigilant watch over market movements and your leveraged positions. Staying well-informed empowers you to make well-reasoned decisions and minimise unforeseen losses.

• Effective Risk Management: Implement stop-loss orders to curtail potential losses. This strategic move can help you circumvent scenarios where interest charges accumulate due to prolonged retention of unfavourable positions.

Also Read: Margin Trading Tips & Strategies for Beginners

Conclusion

Navigating Margin Trading interest rates presents a crucial aspect for traders aiming to capitalise on margin trading. While the tool can unlock substantial opportunities, its associated risks and costs demand careful consideration. The margin trading interest rate can wield a substantial impact on your trading outcomes, hinging on market shifts and trading strategies.

Prior to engaging in margin trading, ensure you’re well-acquainted with the broker’s interest rates, penalties on unsettled margins, and the art of calculating margin interest. Armed with this knowledge, you can make informed decisions, proficiently manage risks, and extract the maximum potential from margin trading while safeguarding your capital.