We live in the era of smart finance, where knowledge is power and smart decisions certainly lead to financial success. Whether we are looking to invest, save, or manage our debt, understanding the fundamentals of finance is essential.
Additionally, today, it has become crucial to understand how to extrapolate the maximum potential of the assets and let our money work for us. Besides, where the current Indian stock market is concerned, it is high time to be more than the spectator in the stock market game and make our portfolio yield returns in more ways than one. Let us see how!
Now, as the stock market currently experiences high volatility, one may find themselves in need of quick cash. Enter the loan against shares, a financial tool that allows borrowers to leverage their stock portfolio as collateral for a loan. By doing so, borrowers can avoid the lengthy and sometimes difficult process of applying for a traditional loan.
Additionally, loans against shares can help borrowers avoid selling their shares during a market downturn, allowing them to hold onto their investments for the long term.
However, just like any power-up in the financial world, loans against shares must also be used wisely.
We, at Rurash Financials, have navigated the ins and outs of loan against shares and have identified some of the following tips that borrowers must keep in mind before taking out a loan against shares, specifically during market volatility:
- Repayment terms and the potential consequences of default: First and foremost, just like with any loan, failure to repay the loan on time can result in the lender selling the collateral shares, which can lead to significant losses if the market is down.
- Comparing interest rates and creditworthiness: Borrowers should be aware of the interest rates on the loan, as they can vary depending on the lender and the borrower’s creditworthiness. It is important to shop around and compare rates to ensure that the borrower is getting the best deal possible.
- Having a plan in place in case of market fluctuations: It is also important to keep an eye on the market and have a plan in place in case the value of the collateral shares drops significantly. This may mean selling some shares or finding additional collateral to secure the loan. Let’s say, if the value of the collateral shares drops by 30%, the borrower may consider selling a portion of the shares to reduce their loan amount or finding additional collateral to secure the loan.
- Understanding the terms and conditions of the loan: Borrowers should have a clear understanding of the terms and conditions of the loan and should read the fine print carefully before signing any agreements. One must be aware of the terms like interest rates, repayment period, penalty charges, and collateral release policy.
- Diversifying collateral shares: It is also important to diversify the collateral shares, it will help to mitigate the risk in case of a market downturn. For instance, if a borrower has a collateral of 1,00,000 shares from a single company, and that company faces a financial crisis, the value of the shares may drop significantly, resulting in a significant loss for the borrower. But if the borrower has diversified their collateral shares, the impact of loss from a single company will be minimal.
- Considering margin requirements: Another important consideration is the margin requirement, which is the percentage of the value of the shares that the borrower needs to provide as collateral. A higher margin requirement can be beneficial during market volatility as it reduces the risk for the lender. However, it also means that the borrower will need to provide more shares as collateral, which can limit their ability to make other investments.
- Evaluating the loan duration: Borrowers should consider the duration of the loan, as some loans may have a shorter repayment period, which could make it difficult to repay the loan in case of market volatility. It is advisable to opt for a loan with a longer repayment period, which will give the borrower more time to repay the loan and also provides flexibility in case of a market downturn.
- Understanding tax implications: Borrowers should also be aware of the tax implications of taking out a loan against shares. In some cases, the interest on the loan may be tax-deductible, while in other cases, this may not be applicable. It is important to consult with a tax advisor to understand the tax implications of the loan and how it will impact your overall financial situation.
Along with these tips, borrowers should additionally consider their overall financial situation and make sure that taking a loan against shares is the right move for them and their financial goals. Loan against shares is a powerful financial tool that can be a valuable addition to an investor’s portfolio, particularly during times of market volatility.
However, as the market changes, so does the game and it’s important to have the right tools to level up the portfolio’s capabilities. After all, it is not a one-size-fits-all solution, and it is important to consider individual financial situations and goals before making a decision.
This makes it crucial to work with the right financial expert, who can provide us with apt guidance and support throughout the process.
At Rurash Financials, one can find the universe of Indian Fixed Income products offering you yields ranging from 4% – 9%p.a. Additionally, get access to fast and secure financing from 10 lacs to 100 crores by using your equity shares, mutual funds, FMP, insurance, or bonds as collateral. Enjoy low-interest rates and convenient online application and instant processing with the help of our loan officers.