Investors should be cautious of margin trading as costs go up

Given the rising cost, one has to remain cautious as margin trade funding comes with inherent risk, and one should trim margin leverage, overall exposure

- BENN KOCHUVEEDAN

THE second-best rally that the market notched up in the year to March 2024 in the past five fiscals with both the indices ratcheting up 25% on-year gains also has set another all-time record in a not-so-popular market segment—the margin trade funding (MTF) book of brokerages.

The MTF book of brokerages made an astronomical growth from ₹7,100 crore in early February 2020 to a tad over ₹57,100 crore this March. For the Sensex, FY21 was the best rally zooming 68%, making the investors richer by tens of trillions with the market cap now sniffing at the $5-trillion-mark.

From the pandemic lows of March-April 2020, the indices have rallied a full 187% by this March. The MTF books of the brokerage industry have more than doubled from around ₹26,000 crore in March 2023 to over ₹57,100 crore this March, or have made an astronomical growth from a meagre ₹7,100 crore in February 2020, according to Icra Ratings.

Higher margin funding costs Such a massive jump in a short span of four years has both brokers as well as investors laughing their way to their banks.

Borrowers, who are the investors here, were being charged only 12-14% as monthly interest on the amount they borrowed from their brokerages as margin funding so far. But that's history now. Brokers will not just walk faster but run to their banks because the pricing has been raised by more than a third of percentage point from this month to 18-20%.