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Loan against securities was earlier limited to the realm of the sophisticated investor or trader. Only people taking large leverage positions were heard of taking out loans against securities. However, now it is a standard product offering that can ease your financial obligations if you hold a sizeable investable portfolio. 

When a situation arises wherein you need money, your first thought is to liquidate your holdings. At that moment, one tends to forget the goals they had in mind when they built their portfolio. They are willing to give it all up to address their current financial requirements. 

There is an even better option available now. Instead of liquidating your holdings, you can take a loan and pledge these securities as collateral. It is a simple and easy way that helps you gain the extra liquidity you need through your rough times. In return, you do not have to give up on your holdings. Investors tend to worry when it comes to taking loans. However, when used wisely, this is a very safe and powerful option that they can utilize. 

Let’s discuss in detail why taking a loan against securities is safe.

(i) The Ownership Factor

We see a crisis, and we tend to liquidate. Taking a loan against securities protects an investor’s portfolio from disintegrating. Remember all the time and effort that went into building your portfolio? Now, you don’t have to worry about losing any of your valuable portfolio components. Your ownership remains intact since you are only pledging your securities as collateral. 

(ii) The Repayment Factor

Drawing a loan against securities helps you have a flexible repayment schedule. You can pay interest only on those securities that you are utilizing. 

(iii) The Prepayment Factor 

Let’s assume you need very urgent short-term liquidity. You decide to take a loan against some of your securities. You get your loan, your amount gets credited to your account, and you fuel up your current liquidity requirements. What happens when you are ready to pay back your principal amount? Unlike the traditional banking system, now you don’t have to worry about any charges related to the prepayment of your principal amount. The highly flexible nature of this platform helps investors address their liquidity requirements in a hassle-free way. 

(iv) The Collateral Factor

Let’s assume you have pledged some of your securities as collateral while taking a loan against securities. You regret not having used the other securities as collateral, as they would have proved more beneficial for you. Midway during your loan tenure, you want to switch to another set of securities in your account for this loan. Did you know you can, as a matter of fact, make that switch midway during your loan tenure? Drawing a loan against securities provides a distinguishable feature, wherein during the tenure of your loan, you can switch to another set of securities in your account and use that as collateral instead.  

(v) The Interest Factor

While pledging your securities as collateral against the loan, you have the advantage of paying the interest only on the amount that you have used. Let’s assume you had an emergency and draw a loan worth Rs. 50,000. The next thing you know, you didn’t even need that much money. You realize you just need Rs 10,000. It becomes a grave nightmare when you realize you have signed up for so much more than you needed and would have to pay unnecessary interest on the amount! 

Getting a loan against securities makes sure you have to pay interest only on the amount you need. In this case, you don’t have to pay interest on the entire Rs. 50,000. You just need to pay interest on the Rs. 10,000 that have been debited from your account to cater to your emergency. 

Club this with an early prepayment option and reap the benefits! 

(vi) The Principal Amount Factor

So much talk around taking a loan by pledging securities, but how much loan does one actually qualify for? 

You can draw a loan worth up to as much as 85% of the value of your pledged shares. Be it a short-term liquidity requirement or a huge financial emergency, your securities out to your rescue, working as collateral whenever you need them to! 

(vii) The Loan Tenure Factor

You can easily take a loan against your securities for 1 year. However, if you need to extend the tenure, you can simply get your loan renewed in a hassle-free manner. 

Drawing a loan against your securities helps care for your short-term and long-term financial needs. 

(viii) The Timeliness Factor

An emergency arises, and you need money, and you need it real quick! 

Now you don’t have to wait for lengthy loan approval and disbursement process. Once you draw a loan against securities, the amount gets disbursed within 48 hours!  

(ix) The ROI Factor

Since you are not disturbing the portfolio you have so carefully created, you can continue to seek the return on investment you had hoped to achieve! Moreover, during your loan tenure, you even get to keep the bonus shares/dividends or any additional surprise you are eligible for. 

(x) The Documentation Factor

Taking a loan against securities saves you from the extensive documentation and the efforts associated with it. You can easily apply for a loan without having to go through the long and tedious document screening process. 

Sounds great, right? 

Let’s have a look at the list of securities that can be pledged as collateral to take a loan: 

(i) Shares

(ii) Tax-Free Bonds

(iii) Equity and Debt Mutual Funds

(iv) Fixed Maturity Plans

(v) Non-convertible debentures

(vi) Kisan Vikas Patra

(vii) Insurance policies issued by LIC and select private insurance companies

Sovereign Gold Bonds

Key  Takeaways

If you have a fully developed portfolio or even individual securities in place, use them as collateral instead of liquidating them for instant liquidity. 

You don’t have to give up on your expected returns. Keep saving, keep investing and when the need arises wherein you need an extra bit of liquidity, draw a loan against your securities. It’s absolutely safe, easy, flexible and hassle-free.

RURASH is one of India’s investment management firms, providing financial solutions to augment the client’s wealth and facilitate building a legacy.

For any guidance regarding financial instruments, Connect with the relationship manager now or write to: loans@rurashfin.com