When will my portfolio stop bleeding? The indicator that everyone has missed

Smallcap Outlook

Small and midcap stocks continue to face selling pressure, despite the Nifty hovering near its all-time high. Market breadth has weakened, and most retail investors are struggling with portfolios running deep in red. This raises a key question that every investor is silently asking: When will my portfolio stop bleeding?

To answer this, we must look beyond price charts and focus on a structural shift that has quietly changed trading behaviour; “the rise of Margin Trading Facility (MTF)”.

Last year, SEBI introduced new rules that pushed up F&O margins. As leveraged strategies became costlier, investors began looking for alternative routes to maintain exposure. This redirected them towards MTF. As a result, brokers expanded their MTF books rapidly, taking the industry-wide exposure from Rs 80,000 crore to nearly Rs 1,18,000 crore within just 1 year. This surge reflects a sharp rise in leverage and a major shift in risk-taking patterns.

MTF allows investors to buy securities by partly funding the trade through their broker, with the remaining amount financed by the broker. It enhances buying power while requiring disciplined margin maintenance. Investors pay an initial margin, and the broker funds the rest of the purchase.

What makes MTF important today is not its growth, but its behaviour during market stress. Over the past five years, major corrections were accompanied by a clear drop in the MTF book. When investors unwind leveraged positions, forced selling intensifies, and small-caps usually feel the hit first. But here lies the insight: historically, reversals often begin when both the MTF book and the BSE Small cap Index falls together.

The below table shows a strong pattern. Whenever both of them decline at the same time, forward returns tend to turn positive. Over the next one, two, and three months, markets have delivered average gains of 2.44%, 4.58%, and 6%, with win ratios of 63%, 84%, and 63% respectively. This makes the MTF book a valuable supporting indicator to anticipate trend shifts especially when sentiments turn pessimistic.

The chart below shows how a fall in both the MTF book and the BSE small cap index has historically led to market bottoming and a subsequent rally.

This year, the MTF book expanded rapidly as investors grew comfortable with leverage. From December last year to December this year, it has risen by 54%. Such a sharp rise often signals complacency and excess optimism. I have earlier discussed how complacency bias can distort market judgement, especially in retail-heavy pockets like small-caps.

Now, the tone is beginning to change. For December 2025, the net MTF book has turned negative by Rs 434 crore, even as the BSE Small-cap Index continues to fall. We are still at an early stage in this cycle, and this alone does not confirm a trend reversal. But historically, this combination marks the first phase of a bottoming-out process.

Investors should not rush to call it a bottom, but they should watch the MTF trend closely. A dip in the MTF book along with a fall in small-cap index will signal that the excessive froth built over the last year may finally be unwinding.

The current correction in small-caps reflects an overdue reset after a year of rising leverage and growing complacency. The recent dip in the MTF book, alongside weakness in the BSE Small-cap Index, suggests that excess risk is just beginning to unwind, a phase that has often preceded healthier market conditions. But it is important to remember that neither the MTF trend nor any single indicator is a holy grail. Markets have no perfect signal. These are simply supporting factors that help us read the broader direction with better clarity.