PPFAS Mutual Fund releases source of margin trading facility book and its impact on liquid funds

PPFAS Mutual Fund has released a note on the source of the margin trading facility (MTF) book and its potential impact on liquid funds. According to the note, the MTF book has increased from Rs 24,920 crore in FY23 to Rs 1.16 lakh crore as of December 2025.

The figure is significant—almost equivalent to the daily equity cash market turnover—and highlights the growing scale of broker funding via MTF. PPFAS noted that the data is shared purely for information and credit assessment purposes.

What is a margin trading facility?

The MTF allows investors to buy shares by paying only a portion of the total transaction value. The broker funds the remaining amount and charges interest on the funded portion, typically in the range of 9%–16%, depending on the broker and market conditions.


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The MTF Book remains concentrated with large bank-backed brokers with close to 50% of market share, while brokers such as Zerodha, Angel One, Motilal Oswal, and Bajaj Securities each command 5–6% market share. The balance is fragmented across the long tail of smaller brokers, and that's where credit and liquidity risk may be relatively higher.

Under current regulations, brokers can fund the positions using their own capital, borrowings from NBFCs, or by issuing commercial papers. Banks face restrictions from the RBI on margin funding and investing in such instruments, which may affect their liquidity and funding flexibility. Consequently, a broker's source and cost of funding are key factors in assessing their stability, credit evaluation and potential exposure risks during market stress.

The recent market discussions have highlighted the counterparty risk and potential losses brokers may face during corrections or crashes, i.e. during periods of high market stress. The market volatility may impact broker funding, potentially leading to margin calls by brokers and the squaring off of leveraged positions. This can increase counterparty credit risk, particularly if liquidity is constrained.

However, brokers' risk management practices, such as stock-specific limits and single-investor exposure limits, act as additional safeguards, helping to protect positions during periods of extreme market stress.

PPFAS Mutual Fund takes on investment in broking companies
The fund house said that one naturally looks at the returns and sometimes misses out on the risk management aspect of the fund, and PPFAS Mutual Fund has often communicated that the liquid fund is a cash management product and not a return optimisation tool.

Robust risk management processes are in place for our cash management products to manage credit and liquidity exposures within the portfolio.

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To manage risk in the current market environment, exposure to broking companies (bank-backed only) is capped at a maximum of 5% of the Parag Parikh Liquid Fund’s portfolio, with exposure to any single company limited to 3%.

These limits are significantly lower than the industry average of approximately 11%, with exposures in certain cases reaching as high as 17–18%. We monitor the portfolio on an ongoing basis for market conditions and company-specific risks and adjust the portfolio as and when needed.

While sharing the investment rationale for bank-backed broking companies, the fund house listed four key rationales.

For the liquidity, the commercial papers of the broking companies the fund house has invested in are liquid in the secondary market and are widely held by institutional investors (excluding banks) and corporates. The liquidity allows PPFAS Mutual Fund to adjust the exposure to broking companies without causing disruption in the portfolio.

For diversified income sources, the portfolio companies have diversified income sources other than MTF, such as brokerage income, income from distribution of Mutual Funds, insurance products, etc. This diversification reduces dependency on any single source of income, supporting stability from a credit and liquidity perspective.

For the liquidity buffer, the excess borrowings are parked in fixed deposits above the margin requirements for immediate liquidity. Ageing MTF receivables (15–30 days) can also be liquidated quickly if needed, reducing the refinancing risk for them.

For the parent support, the approved capital infusion from the parent bank provides a strong solvency backstop. Risk management practices are aligned with processes approved and monitored by the parent entity.

The fund house believes that these elements collectively reflect a structured, risk-conscious approach to investing in broking companies, emphasising prudent management of credit and liquidity exposures. The portfolio maintains flexibility while staying aligned with the Fund's investment guidelines.

(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of The Economic Times)

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