Margin trade funding and loan against shares are both credit facilities which are secured by creating pledge over the existing shares to secure a loan to finance the borrower’s monetary requirements. However, these facilities are very different from each other. To understand the key differences between margin trade funding and loan against shares, we must first try and understand these facilities individually.
Margin Trade Funding (MTF)
Margin Trade Funding (MTF) means borrowing funds to trade beyond the resources one has based on collateral, loan against margin in cash or pledging Demat securities. An individual can easily raise money to buy additional shares, or trades, without him having to sell his long-term securities. In simple words, it’s a loan made available to intraday traders by stockbrokers for the traders to leverage trades that require more funds than they possess. Only SEBI-regulated stockbrokers can offer MTF facilities to traders.
Loan Against Shares (LAS)
Loan against shares is a funding option where borrowers can pledge their shares, to get funding at lower interest rates without having to sell their investments. This form of secured loan can be used to fund various requirements like medical emergencies, buying a home, car, etc. This type of loan is easy to get approved and has less waiting time as it is secured in nature.
Rules may vary from lender to lender however, with lenders like Bajaj Finance Limited, the borrowers can get a Loan-to-Value ratio of up to 50% of the value of their shares and pre-approved offers, subject to sole discretion of and terms and conditions stipulated by to Bajaj Finance Limited. LAS is a smart way of leveraging your investments for loans to meet unexpected expenses.
Margin Trade Funding v/s Loan Against Shares
To understand the difference clearly, here is a comparison between margin trade funding (MTF) v/s loan against shares (LAS) in a tabular format:
Particulars |
Margin Trade Funding | Loan Against Shares |
Explanation |
Availing loan from a stockbroker to trade securities to meet excess cash requirements to carry out the trade. |
Availing loan from a financial institution by pledging shares as collateral. |
Usage |
Leverage trading capital and increase potential gains in the intraday trading strategy. |
Meet any nature of liquidity requirements by pledging shares as collateral for a loan. |
Eligibility |
Seasoned day traders with a good track record. |
Available to individuals between 18-65 years of age who hold shares in a Demat account. This may vary from lender to lender |
Interest Rate |
Generally higher due to the higher risk involved. |
Usually, lower. The shares act as security collateral, which reduces the lender’s risk. |
Loan-to-Value (LTV) Ratio |
50% to 90% of the value of securities purchased with borrowed funds. |
50% of the value of shares pledged as collateral. As per RBI guidelines, the applicable NBFC lending against the collateral of listed shares shall maintain a Loan to Value (LTV) ratio of 50 per cent for loans granted against the collateral of shares. The LTV ratio of 50 per cent shall be maintained at all times. Any shortfall in the maintenance of the 50 per cent LTV occurring on account of movement in the share prices shall be made good within 7 working days. |
Tenure |
Usually, short-term. |
The tenure of the loan is from 7 days to 36 months with Bajaj Finance Limited. |
Flexibility of usage |
Can use borrowed funds for trading. |
Can use borrowed funds for various personal or business purposes. |
Having learned about both the facilities and having known the differences between both, you can take an informed borrowing decision. It is imperative to note that certain terms and conditions and charges and processes may vary for margin trade funding and loan against shares depending on the broker or financial institution offering the services. It is always advisable to thoroughly read the fine print, consult with a financial expert and understand the risks, costs, and terms involved with each facility before deciding which one may be suitable for your needs.
