The Investor’s Smarter Alternative to Liquidation
Experienced investors know that selling assets prematurely is expensive — you lose future gains, pay capital gains tax, and miss the compounding effect. When liquidity needs arise, savvy investors use loan against securities as a bridge, accessing funds while keeping their portfolio fully intact.
A loan against securities covers a broad range of financial instruments — listed equities, mutual funds, bonds, ETFs, and government securities. By pledging these assets as collateral, investors access funds equivalent to a portion of their portfolio value without triggering a single sale.
Loan Against Securities Interest Rates — Understanding the Cost
Loan against securities interest rates vary based on the asset class pledged and the lender’s risk assessment. For equity shares, rates typically range from 9% to 14% per annum. For debt mutual funds and bonds, rates are often lower — 9% to 11% — because of lower volatility. FDs as collateral attract the lowest rates, usually 1-2% above the deposit rate.
The overall borrowing cost is almost always lower than unsecured options like personal loans (which typically charge 12-18%) or credit card cash advances (which can exceed 24%). The secured nature of the loan is the primary reason for this cost advantage.
Loan-to-Value Ratios Across Asset Classes
Lenders apply different LTV ratios based on the risk profile of the pledged asset. For equity shares: typically 50% LTV. For equity mutual funds: 50-60% LTV. For debt mutual funds: 70-80% LTV. For FDs: up to 90% LTV. For bonds: 70-80% LTV, depending on the issuer’s rating.
Savvy investors structure their pledge portfolio to include a mix of high-quality equities and debt instruments to maximise the overall credit limit while keeping interest costs optimised.
Overdraft vs Term Loan — Which Structure Fits Better?
Loan against securities can be structured as a term loan (fixed tenure and EMIs) or as an overdraft facility (revolving credit line). For investors with predictable cash flows and a defined repayment timeline, a term loan provides structure and discipline. For investors managing variable cash flow — such as business owners or freelancers — the overdraft structure offers flexibility to draw and repay dynamically.
Interest on the overdraft is charged only on the outstanding drawn amount and for the actual days it is used. This makes it highly efficient for short-duration needs.
What Happens When Market Values Fall?
The key risk in a loan against securities is a drop in the value of pledged assets. If the market value falls and the LTV breaches the lender’s threshold, a margin call is issued — the borrower must pledge additional securities or repay part of the loan.
Seasoned investors manage this by maintaining LTV well below the maximum allowed, pledging a diversified mix of assets, and keeping a buffer of unpledged securities readily available to top up if required.