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Asked a question 2 years ago

Which is the best Debt ETF/MF to pledge for F&O trading?

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Here is my best suggestion along with key parameters which explains why these are best Direct Debt MFs as per my analysis which can potentially generate 6 to 9% CAGR and can be pledged for collateral with minimum haircut between 7.5% to 10%.

I have chosen these Debt Funds after doing enough research and analysing below important points.
1. Ratings from Agencies or Independent bodies such as CRISIL, Valueresearch, etc.
2. Fund Performance in last 3 to 5 yrs
3. AUM size. It should be High or at least Medium.
4. Risk Matrix: Understand Credit Risk and Interest Rate Risk
5. Fund Manager performance: Make sure FM is managing the fund for quite a good amount of time and not new.
6. Go for Direct Mutual Funds as their Expense Ratio is less and so better returns.

Here is a list of 5 Direct Debt Mutual Funds:
1) IDFC Banking & PSU Debt Fund - Direct – Growth; Average Rank: 4.3, Expense Ratio: 0.3, AUM: 18412 Cr; Haircut: 7.5%
2) Nippon India Banking & PSU Debt Fund - Direct – Growth; Average Rank: 4.3, Expense Ratio: 0.33, AUM: 6918 Cr; Haircut: 7.5%
3) Axis Banking & PSU Debt Fund - Direct - Growth; Average Rank: 4, Expense Ratio: 0.31, AUM: 16363 Cr; Haircut: 7.5%
4) IDFC Government Securities Fund - Investment Plan - Direct - Growth; Average Rank: 4.3, Expense Ratio: 0.61, AUM: 1621 Cr; Haircut: 10%
5) Nippon India Gilt Securities Fund - Direct - Growth; Average Rank: 4, Expense Ratio: 0.61, AUM: 1860 Cr; Haircut: 10%

None of the above funds have any Lockin period or Exit load.

From ETFs point of view, Bharat Bond is best ETF with almost no Expense Ratio, Lowest Haircut of 6% and Expected Return of 5.5 to 6.5%.  Apart from this LIQUIDBEES is another useful ETF to maintain money in account as Cash Equivalent (rather than maintaining cash) and get around 4 to 4.5% returns. 


Most of the Debt ETF/MF will carry the same haircut of 7.5% which is common in most of the funds. There are few funds which may have more haircut. Hence, funds having less haircut will be more beneficial in getting the capital.

Traders can check the haircut of the fund using the below link.

On top of that FYERS is providing a pledge option with 0 charge which is best in class feature compared to the stockbroker.

There are several MFs and ETFs that can be utilized as collateral for trading in the F&O segment (buy/sell futures and sell options). To find out the entire list of schemes that are accepted for pledging, click this link here400.

There are well over than 600 debt funds that can be used as collateral for trading in the F&O segment. The haircut for these ranges from 7.5-10% (can be found in the above link), meaning the rest can be utilized as collateral for F&O trading.

Answering your question, you need to emphasize on a few key things such as the lock-in period of the fund (if any), the haircut of the fund (the lower the better as this would provide you higher margin), liquidity of the fund, and the yield (you can compare the YTM of the fund with the average of the category to which it belongs – the higher, the better).

You can use the entire value of MF/ETF pledge amount (less haircuts) to trade in derivatives. That said, we highly recommend you maintain some balance in the form of cash, in order to meet the MTM requirements.

NiftyBees. b'coz you can hedge it with long term option. Single OTM Covered call with dec expiry and portfolio is fully hedged. Trade weekly options with remaining Margin.

Best Debt fund for Pledge is Bharat Bond ETF EBBETF0423, EBBETF0425, EBBETF0430, EBBETF0431 as they are only instrument with lowest Haircut of only 6% and highly liquid fund as can be sold and bought on NSE and offer good yield of 5-6%

Liquid bees is the best instrument to pledge for F&O trading
Here are some benefits-
(1) No matter how the market is performing liquid bees are always at 1k price point and are highly liquid.
(2)The returns are mostly positive, yielding between 3 to 7% annually.
(3)SEBI mandates 50% of the margin required (when trading futures and selling options) to be maintained in cash. Liquid bees collateral margins are considered equivalent to cash for this purpose therefore the above 50% rule is not applicable in case of liquid bees..
(4)If someone trade in F&O there is no need of keeping cash in trading account, just maintain the stop loss amount and the remaining required margin will be taken care by liquid bees pledging and also by this way
one will be saved from quarterly settlement fund out fund in process.

Yes mutual funds can be used as a margin to trade in F&O

There are 2 options

  1. Pledge your units with banks / NBFC to avail Loan against securities then you can use the funds to trade in F&O. This has the following implications
    1. You may incur interest cost that could be high of 12–15% pa making the transaction riskier. By default you have taken a high risk on derivatives and leverage is built in. Now taking a LAS and paying interest is like 2nd Derivative
    2. Funds that were liquid can become pledged making it illiquid. Now this fund for some reason when down due to the turn of events or market conditions then it has 3rd derivative impact
  2. You may provide mutual fund units as margin to trade in F&O. however, the value of units considered for this purpose is based on exchange VAR % or haircut as it is called which is typically 10% and can vary with the “Implied volatility” of the index. Apart from this, the stockbroker may insist on cash margin to take care of MTM. However, this option will be better than the first option (it leads to excessive leverage)

The ideal situation is, you have an investment in a mutual fund which you can be provided as margin to trade in F&O instead of pledging and taking loan and reckoning with the lending cost. Avoid multiple leverages that can hang like a Damocles sword that kills the profitability of trade and investment too

Hope it helps

I like to invest Debit MF fund, It is giving better then FD return as it is safe if we invest in a good Debit fund invested on "Sovereign"

Kotak low duration fund (G), haircut is 7.5 %, client id DN00134