MTF vs Loan Against Shares: What’s the Difference?
You can borrow money to buy shares.
You can also borrow money against shares you already own.
The two may involve shares and borrowing, but they work very differently.
Margin Trading Facility (MTF) allows you to buy eligible shares using funds provided by your broker. A Loan Against Shares allows you to pledge shares you already own and borrow against their value.
The purpose, how the funding works, the costs and the risks are different.
So, what is the difference between MTF and a Loan Against Shares, and which one makes sense for you?
Let’s break it down.
What Is an MTF and How It Works
Margin Trading Facility (MTF) allows investors to buy eligible shares by paying only a portion of the purchase value upfront. The remaining amount is funded by the broker, and the investor pays interest on the funded amount.
MTF is available only for eligible securities that meet the applicable regulatory and exchange requirements. The list of eligible securities and the margin requirements can vary between brokers.
How Does MTF Work?
Say you want to buy shares worth ₹2,00,000 through MTF. Your SEBI-registered stockbroker requires a 25% margin. Margin is the portion of the purchase value that you need to pay from your own funds.
So, you contribute ₹50,000, while the broker funds the remaining ₹1,50,000.
The shares purchased through MTF serve as collateral, meaning they act as security for the amount funded by the broker.
How Is Interest Charged on MTF?
Interest accrues daily on the ₹1,50,000 funded amount for as long as the MTF position remains open.
For example, at an annual interest rate of 12%, the interest on ₹1,50,000 would be approximately ₹49 per day. If you close the position after 10 days, the interest would be approximately ₹490. If you repay part of the funded amount before closing the position, the interest from that point is calculated on the reduced amount.
The actual interest rate and other charges depend on the broker and the terms of the MTF facility.
What Is a Loan Against Shares and How It Works
A Loan Against Shares is a secured loan that allows investors like you to borrow money against shares you already own. Instead of selling your shares to raise funds, you can pledge them as collateral with the lender.
How Much Can You Borrow Against Your Shares?
The amount you can borrow depends on the Loan-to-Value (LTV) applicable to the shares. LTV is the percentage of the value of the pledged shares that the lender can provide as a loan.
For example, if you own eligible shares worth ₹10,00,000 and the applicable LTV is 50%, you may be eligible to borrow up to ₹5,00,000.
How Does Pledging of Shares Work?
When you take a LAS, you pledge your shares in favour of the lender. This means the shares remain in your ownership but are marked as security against the loan.
The amount you can borrow depends on the Loan-to-Value (LTV) applicable to your shares. LTV is the percentage of the market value of the pledged shares that the lender can provide as a loan. For listed equity shares, 50% LTV is a common industry benchmark, although the applicable LTV may vary depending on the lender, the securities pledged and applicable regulations.
For example, if you own eligible shares worth ₹10,00,000 and the applicable LTV is 50%, you may be eligible to avail a loan of up to ₹5,00,000.
Once the pledge is created, you can access the funds without selling your shares.
How Is Interest Charged on a Loan Against Shares?
Interest is charged on the amount you actually utilise, based on the applicable interest rate.
For example, if your sanctioned limit is ₹5,00,000 but you use only ₹3,00,000, interest is charged on ₹3,00,000, not the entire ₹5,00,000.
Risk Comparison: MTF vs Loan Against Shares
Both MTF and Loan Against Shares involve borrowing against shares, but the nature of the risk is different.
Risks of MTF
With MTF, you borrow money to buy shares, which increases your market exposure. Your gains and losses are therefore based on a larger position than the capital you have contributed.
If the share price falls, the value of the position falls while the amount funded by the broker still needs to be repaid. You also need to maintain the required margin throughout the MTF period.
If the margin falls below the required level, the broker may issue a margin call, requiring you to provide additional funds or securities. If the margin requirement is not met within the stipulated time, the broker may liquidate the shares to recover the outstanding amount, subject to the applicable terms.
Risks of Loan Against Shares
With a Loan Against Shares, you borrow against shares you already own. The loan does not create a new investment position, so it does not increase your market exposure in the same way as MTF.
The primary risk is a fall in the value of the pledged shares. If their value falls enough to breach the permitted LTV, the lender may issue a margin call, requiring you to provide additional eligible securities or funds, or repay part of the loan to restore the required margin.
If the required margin is not restored within the stipulated period, the lender may invoke the pledge and sell the pledged shares to recover the outstanding loan, subject to the applicable terms.
Both products carry market and margin-related risks, but the source of the risk is different. MTF adds leverage to a new investment, while a Loan Against Shares provides funding against an existing investment.
Tax Implications of MTF and Loan Against Shares
Taking a Loan Against Shares does not trigger capital gains tax because pledging shares is not the same as selling them. Tax may apply when the shares are eventually sold.
Similarly, taking an MTF facility to buy shares is not a taxable event by itself. Capital gains tax applies when the shares are sold, based on the applicable tax rules.
The key difference is simple: borrowing or pledging shares does not by itself create a capital gains tax liability. The tax event generally arises when the shares are sold.
When to Choose MTF vs Loan Against Shares
Before choosing between MTF and a Loan Against Shares, consider what you need the funds for.
If you want to buy eligible shares using broker funding, MTF allows you to pay a portion of the purchase value while the broker funds the remaining amount.
If you already own shares and want to access funds without selling them, a Loan Against Shares allows you to pledge those shares and borrow against their value. The funds can be used for permitted personal or business requirements, subject to the lender's terms.
Who Is MTF and Loan Against Shares Suitable For?
MTF may be suitable for investors who want to:
- Buy eligible shares using broker funding.
- Take a larger position in eligible shares by contributing only the required margin.
- Take advantage of a short-term market opportunity, while meeting the applicable margin requirements.
Loan Against Shares may be suitable for investors who want to:
- Access funds against shares they already own.
- Avoid selling their existing shareholding to meet a funding requirement.
- Use the available funds for permitted personal or business requirements, subject to the lender's terms.
Both products have different purposes and risk considerations. Understanding what you need the funds for can help you decide which product is more appropriate for your requirement.
Difference Between MTF and Loan Against Shares: Full Comparison
| Parameter | Margin Trading Facility (MTF) | Loan Against Shares |
|---|---|---|
| Primary purpose | Buy eligible shares using broker funding | Access funds against shares you already own |
| Who provides the facility? | SEBI-registered stockbroker | Bank or NBFC |
| Regulatory framework | SEBI | RBI, where applicable to the lender |
| Existing shares required? | No. You can purchase eligible shares through MTF by providing the required margin | Yes. You need eligible shares to pledge as collateral |
| What is the collateral? | Shares purchased through MTF and the required margin | Shares already owned and pledged to the lender |
| How does the funding work? | Broker funds part of the purchase value | Lender provides a loan against the value of pledged shares |
| End use of funds | Restricted to purchasing eligible securities through the broker | Can be used for permitted personal or business requirements, subject to the lender's terms |
| Interest charged on | Funded amount | Amount utilised |
| When is interest charged? | Generally calculated daily while the MTF position remains open | Generally calculated daily on the utilised amount while the loan is outstanding |
| Market exposure | Increases because you are using borrowed funds to buy additional shares | Does not create a new investment position |
| Margin / collateral requirement | Required throughout the MTF position | Required against the outstanding loan |
| If share prices fall | The value of the MTF position and available margin can fall | The value of the pledged collateral can fall |
| Margin call | May be triggered if the required margin is not maintained | May be triggered if the required collateral cover is not maintained |
| If margin call is not met | Broker may liquidate the MTF position, subject to applicable terms | Lender may invoke the pledge and sell the pledged shares, subject to applicable terms |
| Share ownership | You acquire the shares through the MTF position | You continue to own the pledged shares, subject to the pledge |
| Typical use case | Short-term market opportunity or trading position | Accessing funds without selling an existing shareholding |
The Question to Ask Yourself
Before choosing either, ask yourself: Are you trying to take a bigger position in the market, or are you trying to raise funds against shares you already own?
If it's the first, you're looking at MTF, where you use broker funding to take a larger position in eligible shares. If it's the second, a Loan Against Shares lets you borrow against shares you already hold without selling them. This is an option offered by lenders such as Mirae Asset Financial Services, subject to eligibility and terms of the facility.
Both come with risks if the underlying share price falls. Understanding the margin requirements, LTV and what happens if the required margin is not maintained can help you choose the option that fits your requirement.
Things You Should Know About MTF vs Loan Against Shares
Generally yes. Pledged shares typically remain in your demat account and continue to carry dividend and voting rights, subject to the terms of your lender, unless the shares are eventually sold due to a margin shortfall.
If the share price drops enough to breach the permitted loan-to-value ratio, the lender issues a margin call with a defined cure window. If you don't add funds or shares within that window, the lender can sell enough shares to bring the loan back within the permitted LTV.
Yes, the funds can be used for permitted purposes, including further investing, but a Loan Against Shares does not work like MTF. It is structured as an overdraft facility against your pledged shares. You can draw funds from the available limit as and when you need them, rather than the borrowing being tied to a specific share purchase.