Personal loan: If you are short of funds, your first temptation could be to sell any liquid assets that you have. Some investors invest in term deposits whereas others invest in stocks and mutual funds.
So, unlocking your deposit, redeeming your funds, or selling your securities is quite common to raise immediate cash in case of urgent need.
However, what if the market is faring poorly and so is your portfolio. Selling at this juncture could lead to undoing all the unrealised gains which you have earned in the past. And obviously, you would not want to compromise your financial goals. So what is the answer to this?
One could raise a loan against stocks or funds. These are some of the advantages of raising loans against stocks and mutual funds.
Advantages of loan against securities
I. Financial goals: It prevents you from selling your securities, thus helping you achieve your financial goals well in time.
II. Interest rate: The interest rate of loan against securities is typically lower than that of loan on your credit card. So, you can raise a loan at an affordable rate of interest.
III. Gains justify interest: If shares and funds rise in value, the gains can comfortably justify the cost you incur in the form of interest that you pay on your loan.
Notably, in view of the market volatility, banks are giving out fewer loans against securities. For instance, bank loans against shares rose by 3 per cent in July to touch ₹9,730 crore vis-a-vis 25 per cent growth seen during the same period last year, RBI data shows, reportedBusiness Line.
Meanwhile, some experts do not recommend this practice of raising loans against securities. Preeti Zende, a Sebi-registered investment advisor and Founder of Apna Dhan Financial Services, advises against taking loans against securities. She says that one should create an emergency fund instead of relying on personal loans.
“I always tell my clients that one should have an adequate emergency fund that can cover anywhere between six to nine months of expenses besides a 25 percent buffer so that one does not need to take a loan against shares,” Zende opines.