- Date : 06/03/2023
- Read: 4 mins
Pros and cons of loans against mutual funds and shares
When looking for loans, two main types of loans are available in the market: secured and unsecured.
Secured loans are offered against the security of a collateral asset. For instance, a loan against property, gold loan, home loan, etc., wherein you pledge your asset and get a loan against its value. On the other hand, unsecured loans do not require collateral security. They are issued based on your income and creditworthiness.
Related - Here's a guide to loan against property
Borrowers favour secured loans since they have lower interest rates and are easily accessible. Loans against mutual funds and stocks are also a form of secured loan. Let’s understand what they are and whether they are a good choice.
Loan against mutual funds and stocks – the concept
A loan against mutual funds or stocks is offered against the security of the respective investment. For instance, if you have invested in mutual funds and have a considerable portfolio of such investments, you can pledge the portfolio fully or partially and get a loan against its value.
Similarly, in the case of stock, you can pledge the value of your shareholding and avail of a loan against it.
How do loans against stocks or mutual funds work?
Under these loans, the borrowers pledge their investment portfolio to avail of the funds. The aggregate market value of the portfolio is considered, and the loan is sanctioned against a part of it. For instance, lenders might offer 60% to 70% of the portfolio’s value as a loan.
The investments stay pledged with the lender till the loan is repaid. While you continue to earn returns on your investments, you cannot redeem or sell them before the loan is repaid. However, you can make fresh purchases or investments into mutual funds or stocks without restrictions.
Benefits and drawbacks of loan against shares and mutual funds
Benefits
- Easy availability
These loans are easily available since multiple lenders are offering them. Moreover, with digitized processes, you can pledge your investments easily and get a loan against them. It is much easier than applying for other loans and completing the complicated paperwork.
There’s also a possibility of availing the loan from your broker too. The online process of investment, combined with API, allows you to invest and borrow simultaneously, thus saving effort and time.
- Low interest rates
Since the respective investments secure loans against shares and mutual funds, they carry a low default risk. As such, lenders offer loans at lower interest rates, making them affordable for borrowers.
- Longer repayment tenures
You can get longer repayment tenures to pay off the loan affordably without hurting your budget with expensive EMIs.
- Possible to get a higher loan quantum
If you have a sizeable portfolio, you can avail a good loan quantum for your financial needs.
- Utilization of existing investments
In need of funds, you can pledge it and get the loan rather than liquidating your portfolio. This helps you retain your savings and also meet your financial needs.
Even lenders prefer offering these forms of loans because of the following benefits –
- The risk of repayment default is minimized. Lenders can liquidate the portfolio if the loan is not repaid.
- Data on the pledged assets are easily available, which makes it transparent for lenders to assess the authenticity of the investments.
Drawbacks
- Dependence on portfolio value
The loan quantum is tied to your portfolio’s value. If your investments are not very high, the loan amount might be restricted, making the loan unsuitable for your needs.
- Liquidity restriction
After pledging your investments, you are restricted from liquidating them. This might be concerning when the market dynamics change, and you want to book profits or cut losses.
What should you do?
A loan against mutual funds or stocks can be a good funding source. You can avail of the loan if you have a good portfolio of mutual funds and shares. You can enjoy lower interest rates and utilize your investments too. However, if your portfolio is small or you have other assets to pledge, you can also opt for other secured loans.
So, assess the pros and cons of loans against mutual funds and stocks and make an informed decision.
Related - Here's how you can reduce your loan stress.
Watch this video for a complete guide to loans against mutual funds
When looking for loans, two main types of loans are available in the market: secured and unsecured.
Secured loans are offered against the security of a collateral asset. For instance, a loan against property, gold loan, home loan, etc., wherein you pledge your asset and get a loan against its value. On the other hand, unsecured loans do not require collateral security. They are issued based on your income and creditworthiness.
Related - Here's a guide to loan against property
Borrowers favour secured loans since they have lower interest rates and are easily accessible. Loans against mutual funds and stocks are also a form of secured loan. Let’s understand what they are and whether they are a good choice.
Loan against mutual funds and stocks – the concept
A loan against mutual funds or stocks is offered against the security of the respective investment. For instance, if you have invested in mutual funds and have a considerable portfolio of such investments, you can pledge the portfolio fully or partially and get a loan against its value.
Similarly, in the case of stock, you can pledge the value of your shareholding and avail of a loan against it.
How do loans against stocks or mutual funds work?
Under these loans, the borrowers pledge their investment portfolio to avail of the funds. The aggregate market value of the portfolio is considered, and the loan is sanctioned against a part of it. For instance, lenders might offer 60% to 70% of the portfolio’s value as a loan.
The investments stay pledged with the lender till the loan is repaid. While you continue to earn returns on your investments, you cannot redeem or sell them before the loan is repaid. However, you can make fresh purchases or investments into mutual funds or stocks without restrictions.
Benefits and drawbacks of loan against shares and mutual funds
Benefits
- Easy availability
These loans are easily available since multiple lenders are offering them. Moreover, with digitized processes, you can pledge your investments easily and get a loan against them. It is much easier than applying for other loans and completing the complicated paperwork.
There’s also a possibility of availing the loan from your broker too. The online process of investment, combined with API, allows you to invest and borrow simultaneously, thus saving effort and time.
- Low interest rates
Since the respective investments secure loans against shares and mutual funds, they carry a low default risk. As such, lenders offer loans at lower interest rates, making them affordable for borrowers.
- Longer repayment tenures
You can get longer repayment tenures to pay off the loan affordably without hurting your budget with expensive EMIs.
- Possible to get a higher loan quantum
If you have a sizeable portfolio, you can avail a good loan quantum for your financial needs.
- Utilization of existing investments
In need of funds, you can pledge it and get the loan rather than liquidating your portfolio. This helps you retain your savings and also meet your financial needs.
Even lenders prefer offering these forms of loans because of the following benefits –
- The risk of repayment default is minimized. Lenders can liquidate the portfolio if the loan is not repaid.
- Data on the pledged assets are easily available, which makes it transparent for lenders to assess the authenticity of the investments.
Drawbacks
- Dependence on portfolio value
The loan quantum is tied to your portfolio’s value. If your investments are not very high, the loan amount might be restricted, making the loan unsuitable for your needs.
- Liquidity restriction
After pledging your investments, you are restricted from liquidating them. This might be concerning when the market dynamics change, and you want to book profits or cut losses.
What should you do?
A loan against mutual funds or stocks can be a good funding source. You can avail of the loan if you have a good portfolio of mutual funds and shares. You can enjoy lower interest rates and utilize your investments too. However, if your portfolio is small or you have other assets to pledge, you can also opt for other secured loans.
So, assess the pros and cons of loans against mutual funds and stocks and make an informed decision.
Related - Here's how you can reduce your loan stress.
