Finance Guru Speaks: This article will guide you on which leverage method is better between MTF (Margin Traded Funding) and F&O (Futures & Options)
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| MTF vs F&O: Which is better? |
Leverage is the fastest way to grow your capital or destroy it. Most traders misuse leverage because they don’t understand the fundamental truth.
Margin Trading Facility (MTF) is objectively safer and more efficient than Futures & Options (F&O) for 95% of traders.
This isn’t an opinion - it’s a data-backed reality. If you are using F&O without a professional edge, you’re gambling and not trading. Here’s why MTF is the superior choice and when F&O makes sense.
The Brutal Truth About F&O
Why F&O is a Trap for Retail Traders
1. Extreme Leverage = Faster Ruin
- F&O offers 2x-5x leverage, meaning a 5% move against you wipes out 10-25% of your capital.
- Fact: 95% of F&O traders lose money within 12 months (SEBI data).
2. Time Decay (Theta) Eats Your Money
- Options buyers lose value every day, even if the market doesn’t move.
- Example: Buying a weekly Nifty call option? You need the market to move immediately in your favour - or you lose.
3. Margin Calls and Forced Squaring Off
- Futures traders face daily mark-to-market (MTM) losses. A single gap-down can liquidate your position before you react.
When F&O Works (For 5% of Traders)
- Hedging: Professionals use F&O to protect portfolios (e.g., buying puts during crashes).
- High-Frequency Trading: Algorithms exploit micro-inefficiencies where retail traders can’t compete.
Verdict: Unless you’re a hedge fund or full-time prop trader, avoid F&O.
Why MTF is the Only Leverage Tool You Need
The Unmatched Advantages of MTF
1. Controlled Leverage (1.5x-5x)
- Enough to amplify gains, not enough to blow up your account.
- Example: With ₹1 lakh, you can buy ₹3 lakh of stocks. A 10% gain = ₹30k profit (vs. ₹10k without leverage).
2. No Time Decay
- Stocks don’t expire. Hold as long as needed (unlike F&O’s weekly/monthly expiry).
3. Lower Risk of Catastrophic Loss
- Worst case: Your stock goes to zero (unlikely for large caps).
- Compare this to F&O, where a single bad trade can wipe out your capital.
4. Interest Cost is Manageable
- Brokers charge ~0.05%-0.1% per day. For a 5-day swing trade, that’s just 0.5% cost.
When to Use MTF
- Swing Trading (3-30 days): Buy high-conviction stocks with 3x leverage.
- Long-Term Investing: Accumulate blue-chips (e.g., HDFC, Reliance) with borrowed funds.
Pro Tip: Always use MTF for stocks, never for indices.
In future articles, I will cover additional aspects of Trading and Investing. Keep Reading!