Many investors take Loan Against Securities, or LAS, to get cash without selling their stocks. Sounds clever, right? You keep your investments, you get the money you need, and you pay a relatively low interest rate. What could go wrong? Well, a lot. In my opinion, this is one of those products that looks great on paper until the market turns against you.
Let me explain how it works. You pledge your shares or mutual fund units as collateral. The lender gives you a loan based on the value of those assets. For equity shares, the Loan to Value, or LTV, is capped at 50%. So if you have ₹10 lakh worth of stocks, you can borrow up to ₹5 lakh. Mutual funds work similarly. Equity funds get around 50% LTV, debt funds can go up to 80% because they are less volatile. The interest rates are usually 10% to 12%, which beats a personal loan. So far so good.
But here is the catch. Not all stocks qualify. Lenders maintain an "Approved List" of high liquidity stocks, typically from the Nifty 500 or similar indices. If your portfolio is full of mid caps or small caps that are not on the list, you might not get a loan at all. Or you might get a lower LTV. And the list can change. A stock can be removed if it gets too volatile or illiquid. So you need to check what you actually have before you assume you can borrow against it.
Now for the scary part. If the market drops and your portfolio value falls, your LTV goes up. Say you borrowed ₹5 lakh against ₹10 lakh of stocks. Your LTV is 50%. If your stocks fall to ₹8 lakh, your LTV is now 62.5%. The lender will not like that. You will get a margin call. You have 24 to 48 hours, sometimes less, to either pledge more shares or repay part of the loan to bring your LTV back below the limit. If you cannot do that, the lender sells your shares. And guess when they sell? At market lows. When everyone is panicking. When prices are already down. This is how people who thought they were being smart end up losing money. You lock in your losses at the worst possible time.
I have seen this play out. Someone takes LAS to fund a down payment or a wedding or a business need. The market is doing fine. Then it corrects 15% or 20%. The margin call comes. They do not have spare cash. They do not have more shares to pledge. The lender sells. They lose their position and their capital at the bottom. It is brutal.
So when does LAS make sense? I personally think it should only be used for very short term needs. Maybe you need cash for a week or two while you wait for a fixed deposit to mature. Or you have a temporary gap between selling one property and buying another. In those cases, the risk of a sharp market drop in that short window is low. But using LAS as a lifestyle tool, to fund vacations or cars or regular expenses, is asking for trouble. The market will correct at some point. It always does. And when it does, you do not want to be holding a margin call.
One more thing. If you do use LAS, keep a buffer. Do not borrow the full 50%. Borrow 30% or 40% so you have room if the market dips. And have a plan. Know where you will get the money if you get a margin call. A line of credit, a family member who can lend quickly, or cash you can access. Because when the call comes, you will not have time to think. You will have hours. Plan ahead, or do not do it at all.