Equity-backed loans surged amid bullish growth. Is it a good idea to borrow against securities? Experts’ answer

A number of investors took out personal loans against their stocks and mutual funds, partly because of the bull run (which apparently ended with a 10 percent correction). Latest RBI data shows that outstanding loans against shares and bonds as of August 2024 stood at ₹9,722 crore, an increase of about 27 percent year-on-year.

At the same time, as of August 2024, the overall consumer loan category grew by 14 percent year over year.

A number of banks such as HDFC Bank and ICICI Bank offer loans against securities. You can get up to 50 percent of the net asset value (NAV) of mutual funds.

This ratio is higher (80 percent) of the surrender value in case of debt mutual funds or FMPs (Fixed Maturity Plans). You can apply for a securities loan through online banking. This loan is provided as an overdraft and interest is charged on the amount used.

Is it rational to do this?

Some wealth consultants argue that this is an unhealthy trend.

“The market has been growing over the past few years, but this will not always be the case. In fact, it has already corrected by 10 percent. However, most financial institutions give away only 40-50 percent of the portfolio value. Hence, in the future, only 20–25 percent of the portfolio should be raised as a loan. Any loan exceeding this amount can become a problem,” says Sridharan S, Founder, Wealth Ladder Direct.

Ravi Saraogi, co-founder of Samasthati Advisors, says borrowing against securities is both good and bad. “Sometimes a person may be in dire need of money due to a health emergency or to fund someone’s education, help a relative, and so on. Thus, you can take out a consumer loan against securities,” he says.

“When you raise money against stocks or mutual funds, the cost of borrowing is lower compared to a personal loan. But the downside is that you are borrowing against the investment, and if you fail to repay it, your investment will be sold off. , you shouldn’t get used to this. Even if interest rates are low, this is the cost of raising money,” he adds.