How a Loan Against Securities Works
A loan against mutual funds or shares allows you to pledge your existing investment holdings as collateral in exchange for a loan, typically structured as an overdraft facility, without having to sell the underlying investments. Your investments continue to remain in your name and, in most cases, continue to earn returns or generate dividends while pledged, though a lien is marked on them restricting you from selling or transferring them until the loan is repaid.
Why Investors Consider This Option
Selling investments to raise funds can trigger capital gains tax and also means missing out on potential future growth if the market moves favourably afterward. Borrowing against the holdings instead avoids triggering a sale, and since it is a secured loan, the interest rate is often more competitive than an unsecured personal loan, and processing can be relatively quick since the lender already has visibility into the value of the pledged securities.
Key Risks to Understand
Loan-to-Value Fluctuates With Market Value
The amount you can borrow is generally a percentage of the current market value of your pledged holdings, and this eligible amount, along with your margin requirement, can change as the value of the underlying shares or mutual fund units fluctuates.
Margin Calls
If the market value of the pledged securities drops significantly, the lender may issue a margin call requiring you to pledge additional securities or repay part of the loan to restore the required margin, and failing to respond can lead to the lender selling some of the pledged holdings to recover the shortfall.
Interest Accrual on an Overdraft Structure
Since this is often structured as an overdraft, interest is typically charged only on the amount actually utilised and for the period it remains outstanding, rather than on the full sanctioned limit, which can make it cost-efficient if used carefully.
Not All Securities Qualify
Lenders typically maintain an approved list of shares and mutual funds that are eligible to be pledged, often based on factors like liquidity and volatility, so not every holding in your portfolio may qualify.
How MoneyCashe Assists You
MoneyCashe helps you understand how a loan against securities compares to other borrowing options such as a personal loan or loan against property, based on what you actually need funds for and what collateral you are comfortable using.
Loan Against Mutual Funds & Shares: An Alternative Option FAQs
Do I lose ownership of my shares or mutual funds when I pledge them?
▼No, ownership remains with you; a lien is marked on the pledged holdings restricting sale or transfer until the loan is repaid, but you continue to hold them in your name.
Do I still earn dividends or returns on pledged investments?
▼In most cases yes, pledged mutual funds or shares continue to earn dividends or growth, though this can depend on the specific lender's terms.
What happens if the market value of my pledged securities falls?
▼The lender may issue a margin call requiring additional collateral or partial repayment to restore the required margin; failing to respond can lead to the lender selling some pledged holdings to recover the shortfall.
How is interest charged on this type of loan?
▼It is often structured as an overdraft, where interest is charged only on the amount actually utilised and for the period it remains outstanding, rather than on the entire sanctioned limit.
Can I pledge any mutual fund or share I own?
▼Not necessarily; lenders typically maintain an approved list of eligible securities based on factors like liquidity, so it is worth checking whether your specific holdings qualify.
Is this loan type faster than a personal loan?
▼Processing can be relatively quick since the lender already has visibility into the value of the pledged securities, though actual timelines vary by lender.
Is the interest rate lower than an unsecured personal loan?
▼It is often more competitive since the loan is secured, though the exact rate depends on the lender and the specific securities pledged.
What happens to the loan if I want to sell the pledged shares?
▼You would generally need to either repay the loan, or the relevant portion of it, to release the lien before those specific shares can be sold, subject to the lender's process.
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