A number of investors raised personal loans against their shares and mutual funds partly because of the bull run (that has apparently ended with 10 percent correction having taken place). The latest RBI data shows that outstanding loans against shares and bonds as of August 2024 stood at ₹9,722 crore, growing around 27 per cent year-on-year.
At the same time, the overall personal loans category has grown by 14 per cent year-on-year as of August 2024.
A number of banks such as HDFC Bank and ICICI Bank offer loan against securities. One can get get up to 50 percent of the net asset value (NAV) of equity mutual funds.
This ratio is higher (at 80 percent) of the surrender value in case of debt mutual funds or FMPs (fixed maturity plans). One can apply for loan against securities on the net banking. This loan is given as an overdraft facility and the interest is charged on the amount used.
Is this rational to do?
Some wealth advisors argue that this is not a healthy trend.
“The market has been rising for the past few years but that would not be the case always. In fact, it has already corrected by 10 percent. Moreover, most financial institutions give only 40-50 percent of the value of portfolio. From that perspective, one should raise only 20-25 percent of the portfolio as loan. Any loan bigger than that can be a problem,” says Sridharan S, founder of Wealth Ladder Direct.
Ravi Saraogi, Co-founder of Samasthati Advisors, says it is both good as well as a bad idea to raise loan against securities. “One may, at times, be in an urgent need of money because of health emergency, or to fund someone’s education, to help a relative, and so on. So, one can take a personal loan against securities,” he says.
“When you raise money against shares or mutual funds, the cost of borrowing is lower in comparison to personal loan. But the downside is that you are taking loan against investments and if you fail to repay it, your investments will be sold off. Additionally, you should not get used to this. Even if the interest is low, it is a cost of raising money,” he adds.