Loan Against Stocks: Features, Benefits, and Procedures

Summary: 

• A loan against mutual funds or stocks allow you to borrow money by pledging your investments as “collateral”. 

• The loan amount depends on the market value of your portfolio and the lender’s loan-to-value (LTV) ratio. 

• You continue to own your investments and may still receive dividends or benefit from market gains during the loan period. 

• Since it is a secured loan, interest rates are generally lower than unsecured options like personal loans or credit cards. 

Loan against mutual funds or stocks is a facility that allows you to borrow money using your stock holdings or mutual fund units as “collateral”. Also known as securities-backed lending, in this arrangement: 

• You first “pledge” your shares, mutual fund units, ETFs, or bonds to a lender and 

• Then, receive funds based on the decided LTV (Loan to Value) ratio 

The advantage? 

There is no need to sell your investments. They continue to remain in your name and earn returns while being pledged. Once you repay the loan along with interest, the lender releases the pledge, and you regain full control of your investments.  

Want to learn more? 

Read this article to understand how loans against stocks or mutual funds work, their latest features, and the application process. 

Primary Features of Loan Against Mutual Funds/ Stocks 

In this funding option, the sanction amount depends on the market value of the pledged stocks or mutual funds. Mostly, lenders approve a percentage of this value, known as the “loan-to-value (LTV)” ratio.  

As per industry understanding, investors with larger or diversified portfolios may qualify for higher loan limits.  

In addition, the loan application process is usually online and carries minimal documentation requirements.  

Need more clarity?  

Let’s check out some more features of a loan against stocks/MF units:

3 Major Benefits of a Loan Against Mutual Funds/Stocks 

A loan against stocks or mutual funds provides “immediate liquidity” without selling investments. As a borrower, you can: 

• Use your portfolio as collateral and 

• Receive funds based on its value 

Moreover, no extensive income verification is required in most cases. Some more benefits you may realise are: 

1. Continued Ownership + Market Participation 

One of the main advantages is that the securities are only pledged to the lender. Ownership remains with the investor, and the portfolio continues to exist in their name.  

During the loan period, investors may still receive dividends, bonus shares, or benefit from market appreciation if prices increase. 

2. Lower Interest Cost Compared to Unsecured Loans 

Loans against securities are classified as “secured loans” because they are backed by financial assets. This reduces the lender’s risk and results in lower interest rates compared to unsecured borrowing options such as personal loans or credit cards. 

3. Freedom to Use Funds Without Restrictions 

A loan against stocks or mutual funds does not impose restrictions on how the funding is used. Borrowers may use the amount for: 

• Personal expenses 

• Business requirements 

• Education costs, or 

• Debt management 

In this arrangement, the lender’s primary concern is “repayment capability” and not the end use of funds. 

How to Apply for a Loan Against Mutual Funds/Stocks? 

Step 1: Evaluation of Securities 

The lenders review your mutual funds or stocks. Investments that are widely traded and easy to sell are generally accepted. 

Step 2: Loan Amount Calculation (LTV Ratio) 

The loan amount is not equal to the full value of your investments. Usually, the lender approves a lower percentage, based on the decided loan-to-value (LTV) ratio.  

For example,  

• Suppose your mutual fund portfolio is worth ₹5 lakh (as per the current NAV). 

• Now, the approved loan may be 70-80% of that amount. 

• You may get a loan anywhere between ₹3.50-₹4 lakhs. 

Step 3: Agreement of Loan Terms 

You review and accept the loan terms, which usually cover the following: 

• Interest rate 

• Repayment schedule 

• Applicable charges, and 

• Other conditions. 

Step 4: Pledge of Investments 

Your stocks or mutual fund units are pledged in favour of the lender for the loan period. The investments remain in your name, but they cannot be sold or transferred until the loan is repaid. 

Step 5: Loan Disbursement and Repayment 

After approval + pledge confirmation, the loan amount is credited to your bank account. You repay the loan along with interest as per the agreed schedule. Once the full repayment is completed: 

• The pledge is removed and 

• You regain 100% control of your investments. 

Conclusion 

So now you know what a loan against mutual funds or stocks is, its primary features, benefits, and how it works. If we were to recap, a loan against securities is a secured loan offered in lieu of stocks, mutual funds, ETFs, or bonds being pledged as collateral.  

Usually, the sanctioned amount depends on the quality + value of the portfolio and the applicable LTV ratio. Also, since the loan is backed by securities, the interest rates are generally lower than those of unsecured loans.