Loans Against Securities Explained: Your Essential Guide

To avail of a loan against investments like mutual funds and shares, your holdings must be in the demat form, and all KYC-related details and documents must be updated with your broker and bank

Loans against securities typically come with a processing fee that is up to 3 per cent of the loan amount.

Source : FreePik

Mutual funds and shares are excellent avenues that offer inflation-beating returns in the long term for wealth creation. But, did you know, that besides being investments, these instruments can also serve as collateral to access funds in need? If you have invested in mutual funds or shares and need funds, taking a loan against these instruments instead of liquidating them may be a win-win for it keeps your investment intact while accessing the funds you need.   

Which shares or funds can you pledge? 

To avail of a loan against investments like mutual funds and shares, your holdings must be in the demat form, and all KYC-related details and documents must be updated with your broker and bank.  

Only shares and mutual funds approved by the bank can be pledged as collateral. Banks usually provide a list of eligible companies and funds. Typically, shares of listed companies qualify for loans, while shares of banned or delisted companies do not. Similarly, mutual fund units in segregated schemes due to defaults are also ineligible for loans. 

How much can you borrow? 

In the case of shares, you can typically borrow up to 50 per cent of the shares’ current value. With equity mutual funds, you may borrow up to 50 per cent of the fund's net asset value (NAV), and 80 per cent of the NAV in case of debt mutual funds. Generally, loan amounts range from a minimum of Rs 50,000 to a maximum of Rs 20 lakh. Some banks may impose a cap on the maximum loan amount.  

What is the interest rate and fee applicable?  

The interest rate on loans against securities typically ranges from 7 per cent to 15 per cent per annum. Do note that loans against equities are available as overdraft loans wherein interest is charged only on the amount utilised and not the amount disbursed. For example, you have been granted a loan against equity of Rs 7 lakh. Out of this, you withdraw only Rs 3 lakh, which you repay within a month. So, you’ll only pay interest for one month on the utilised amount i.e. Rs 3 lakh.    

Loans against securities typically come with a processing fee that is up to 3 per cent of the loan amount. To determine the amount of collateral you need, calculate the value of your shares or mutual funds required to meet your financial need. You can pledge your securities through depositories like NSDL and CDSL.    

Things to remember 

• Once you pledge your securities as collateral, they come under lien and cannot be sold or traded. You can trade them after you have repaid the loan.
• Like other loans, the lender can liquidate your securities if you default on your loan.
• Your credit score will be checked for loan approval.
• The lender will assess the value of your units before sanctioning the loan.

Before opting for a loan against securities, evaluate your financial needs and repayment capacity. The repercussions of defaulting on such a loan extend beyond damage to your credit score – you could lose your investments. If you're in need of funds and considering pledging your shares or mutual funds for a loan, look at the latest interest rates offered by various lenders. 

EMI on loan of Rs. 10 lakh for 3 years 

Banks/FIs BANKS	Interest (pa)	EMI
ICICI Bank	8.50 per cent	Rs 31,568
Punjab National Bank	12.75 per cent	Rs 33,574
Axis Bank	11.49 per cent	Rs 32,971
Indian Bank	10.00 per cent	Rs 32,267
Kotak Mahindra Bank	8.5-11 per cent	Rs 31,568
IDBI Bank	10.15 per cent	Rs 32,338
Bank of Baroda	9.90 per cent	Rs 32,220
State Bank of India	10.05 per cent	Rs 32,291
Federal Bank	12.50 per cent	Rs 33,454
Indian Overseas Bank	11.25 per cent	Rs 32,834
NBFCs
Tata Capital	8.00 per cent	Rs 31,336
SMFG India Credit	9.00 per cent	Rs 31,800
IIFL Finance	10.00 per cent	Rs 32,267

Disclaimer: Data compiled by BankBazaar.com. Data collected from respective bank and NBFCs websites as of September 12, 2024. The lowest rate, regardless of loan amount or tenure, is used in the table. EMI is calculated based on the listed interest rate for a Rs 10 lakh loan over a 3-year tenure (processing and other charges are assumed to be zero). Interest and charges may vary depending on factors such as security, credit rating, and loan tenure.

The author is the CEO of BankBazaar.com. This article has been published as part of a special arrangement with BankBazaar.