Understanding Loans Against Securities
Loans against securities offer a convenient way for investors to raise cash without selling their investments. However, this facility comes with risks linked to market fluctuations and margin calls.
How it Works
Investors pledge eligible shares or mutual fund units to borrow cash, with the collateral value linked to the market. RBI rules set loan-to-value (LTV) ceilings of 60% for listed shares, 75% for mutual funds, and 85% for debt mutual funds. Lenders monitor LTV on an ongoing basis, and a sharp market fall can trigger a margin call.
Risks and Considerations
A market fall can turn a liquidity solution into a repayment problem. Investors may have to find cash at short notice to restore the required margin or face the lender invoking the pledge and selling the securities. Borrowing against investments is particularly risky when the money is needed for a recurring expense rather than a short‑term cash gap.
Charges and Interest Rates
Loans against securities may cost less than unsecured borrowing, but interest still runs while the money remains outstanding. There can also be processing, lien creation, annual maintenance, invocation, and other charges.
Key Takeaways for Investors
Before taking a loan against securities, investors must check the lender's eligible‑security list, LTV, margin‑call trigger, cure period, interest calculation, and charges. It's also essential to keep a separate cash buffer to meet a margin call without being forced to sell investments immediately.
Conclusion
The convenience of loans against securities may not justify the risk if investors are uncertain about repaying the loan even if the portfolio falls sharply. Careful consideration of the terms and risks is crucial before opting for this facility.