Amid market uncertainty: Is a loan against securities the right choice?

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Knowing loan against securities

Loan against securities (LAS) allows you to avail a loan by providing collateral in the form of shares, mutual funds, bonds, or other money instruments. Instead of liquidating your investments, you can have liquidity in your hand and yet hold onto the ownership. The bank or NBFC provides you with a line of credit or amount loan, typically for 50–70% of the value of securities provided as collateral. This makes LAS a magnet for funding short-term costs, funding business needs, or even investing in new business ventures.

The lure in times of uncertain markets

During times of turbulence in the stock market, the vast majority of investors are reluctant to liquidate positions at inopportune prices. A loan against securities presents an option—you retain your portfolio while gaining access to cash. For example, if you believe the market will recover, committing rather than selling provides a guarantee that you do not miss out on future gains. Second, interest rates on LAS are lower than unsecured personal loans or credit cards and are thus comparatively cheap for short-term financing requirements.

Margin call and value erosion risks

Volatility renders LAS convenient but riskier. If the value of the pledged securities drops severely, the lenders will call a margin on you, asking you to repay part of the loan or introduce additional securities. If you fail to act, the lender can sell your position at bad prices, resulting in potential monetary loss. In highly volatile markets, these kinds of risks increase significantly, and therefore LAS is not suitable for people with weak capacity to endure sudden repayment demands.

When las makes sense

A securities loan is a good move if you need immediate money but are strongly sure that markets will rebound. It is best for diversified portfolio owners and payers of excess liquidity who can absorb margin calls in case they are issued. It is best also when borrowed funds are being productively invested—such as business expansion, funding education, or retiring costly debt—compared to using it for discretionary purchases.

Key things to remember before borrowing

Before you embark on LAS, know your risk tolerance and repayment capacity. Harmonize the lender's margin call policy, interest rate, and LTV ratio. Understand that as your investments increase, they are illiquid and cannot be readily liquidated. Above all, never use funds to borrow against securities from monies you can ill afford to lose, especially during volatile market periods when asset prices can swing far and wide.

FAQs

Q1: How much can I borrow in a securities loan?

Lenders are normally willing to lend 50–70% of the collateral value of the securities but will vary according to the security type and the market condition.

Q2: Is loan against securities preferable to selling my investment?

It depends. If you expect markets to come back and you don't wish to lose cash, LAS may be more favourable. Selling, however, could be safer in the event you cannot absorb margin call risk.

Q3: What happens if I cannot meet a margin call?

Your collateralized securities will be liquidated by the lender to cover dues, typically in negative market prices that can escalate your losses.