Retail investors borrowing money from brokers to buy shares have been doubling down on some of India’s worst-performing blue chips, in the hope that these stocks will bounce back despite steep declines over the past year.
Stockbrokers offer a so-called margin trading facility (MTF) for investors to borrow funds to buy shares. MTF refers to an arrangement where an investor buys stocks by partly using her own money and partly by borrowing from a broker.
Four of the top five stocks in the MTF book by value—Jio Financial Services Ltd, Tata Consultancy Services Ltd, Tata Motors Ltd, and Reliance Industries Ltd—have fallen 13%, 31%, 22%, and 3%, respectively, over the past year, National Stock Exchange data show. Hindustan Aeronautics Ltd is an exception; its shares rose 13%.
NSE’s total MTF book, meanwhile, surged to about ₹99,000 crore on 1 October from ₹68,004 crore on 7 April, when the Nifty 50 declined 3.4% because of escalations in the global trade war unleashed by US President Donald Trump. Over the past year, the benchmark index has declined 1.4%.
Market experts warn against using margin loans to invest in stocks that have been in the red for long. “We think the MTF book exposure towards nonperforming stocks is not sustainable as the recent phase of sell-off in stocks would have triggered margin calls,” said Ankit Soni, associate vice president at brokerage and financial services platform Mirae Asset Sharekhan.
Falling share prices trigger margin calls where traders either close the position or infuse further money. In such a situation, shares bought with borrowed money lose value, and the broker demands more money from investors to cover the shortfall.
Buying the dip
Retail investors hold on to sliding blue chip stocks expecting an eventual reversal in fortunes, but the outcomes may not work out, according to market experts.
Let’s illustrate with an example. An investor buys shares worth ₹1 lakh with ₹25,000 from her own funds and ₹75,000 borrowed from brokers.
If the share price rises 10%, the value of the investor’s holding would increase to ₹1.1 lakh. After repaying the broker, including interest, the investor would still be left with a profit.
But if the stock price falls 10%, the value of the holding becomes ₹90,000 and value of the investor’s own holding becomes ₹22,500. So, the investor will have to put in another ₹2,500 to maintain the minimum margin (usually 25%), as her original investment was ₹25,000.
Stocks bought using margin loans can be held indefinitely. “If traders expect returns to be more than the interest to be paid to the broker, they consider it as cheap borrowing compared to personal loans,” Soni said.
Stockbrokers typically offer margin loans at interest rates of 10-12% per annum. Investors hold such stocks for two to three months, which translates to an interest of 2.5-3%, allowing for returns of 8-10%, said Prakash Gagdani, chief executive of Torus Digital, a broking firm.
Investors should ideally avail margin loans to buy and hold shares for a short period. If they want to hold stocks for a year or longer, margin trading facility is not ideal as the cost would be high, he added.
“If the stock price goes down and the holding period increases, then the overall loss on investments is way high,” Gagdani said.
Jio Financial Services was the biggest draw among these stocks. Investors availed ₹1,363 crore via the MTF route to buy shares of the company, followed by ₹1,358 crore for TCS, and ₹1,282 crore for Tata Motors, per NSE.
Abhinav Tiwari, research analyst at Bonanza Portfolio Ltd, said that despite Jio Financial’s negative returns over the past year, investors are betting it has the potential to shake up traditional banking through digital lending and payments riding its parent Reliance Industries Ltd’s brand.
