The unwinding of leveraged positions built through MTF (margin trading facility) has resulted in sharp fall in small stocks last month.
This has resulted in the Nifty small-cap 250 index falling 5 per cent to 16,764 points on Friday against 17,589 points on September 30. However, Nifty was up 2 per cent at 23,053 points in the same period.
The average MTF in October has fallen to ₹1.51 lakh crore in October against ₹1.56 lakh crore in September as traders unwound their MTF book with concern on small-cap stocks earnings linger with rising interest rate.
NSE accounted for the lion’s share of MTF book at ₹1.44 lakh crore while the same on BSE was at ₹7,405 crore last month. Interestingly, NSE flagged brokers for MTF violations, including inadequate margins and funding against ineligible stocks outside the Group I category besides lapses in monitoring of Authorised persons. The exchange found instances where brokers provided the facility against securities that were not eligible.
As per BSE and NSE data compiled by Care Edge Ratings, MTF book size has been growing consistently from ₹96,000 crore in August 2025 to ₹1.48 lakh crore in August 2026. With the banks and other source of funding becoming tight, investors are taking risky bets using MTF.
CA Pankaj Agrawal, Director, Valmiki Leela Capital said a fall in small-caps can put pressure on blue-chip stocks too, as investors may be forced to sell them to meet their repayment obligations.
Money coming into small-cap funds through SIPs has helped keep the market supported, but that does not mean valuations can keep rising without earnings support, he said.
Rising interest rates could make things more difficult for small-cap companies, especially those that depend on borrowing to run their businesses or fund expansion, said Agrawal.
The Nifty small-cap 250 has been trading at about 32 times against the five-year average of about 27 times on back of steady flows through mutual fund route. The inflows into small-cap MF schemes was up 42 per cent at ₹24,779 crore in the September quarter against ₹17,433 crore in June quarter.
Siddharth Purohit, Fund Manager-Equity, InvestValue Capital said nearly 44 per cent of SIP inflows are channelled into mid- and small-cap schemes where valuations in certain pockets have become stretched.
While near-term valuation concerns remain, investors who have maintained their investments over the past 4–5 years have witnessed relatively strong returns from these segments, he said.
Select companies have consistently delivered high double-digit earnings growth, a trajectory that is relatively difficult to replicate across large-cap and index constituents, he added.
Aakansha Shukla, AVP, Wealth Management, Master Capital Services said if MTF positions face margin calls, investors could be forced to sell liquid large caps to raise cash, creating temporary pressure across the market.
Liquidity can cushion a correction in mid- and small-caps, but it cannot permanently defend valuations that are disconnected from earnings, she said.
Higher lending rates can squeeze financing costs and margins, particularly for leveraged small companies, while a domestic slowdown could weaken demand and revenue growth, she added.
Published on November 1, 2026
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