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Quick Summary
- LAS is a secured facility where eligible investments are pledged as collateral, often structured as an overdraft rather than a term loan.
- Interest is generally charged on the amount actually utilised, not on the entire sanctioned limit.
- Borrowing capacity depends on the type of security and the lender's LTV; not every security is accepted by every lender.
- A market fall can reduce your limit, trigger a margin shortfall and, in the worst case, a forced sale of pledged securities.
- LAS works best as a disciplined liquidity-management tool, not as a means of persistent leverage.
Table of Contents
What if you could access ₹1 crore of liquidity without selling a single investment?
For many investors, a significant portion of wealth is invested in equities, mutual funds, bonds and other financial assets designed to compound over the long term. Yet, when a large cash requirement arises, selling these investments may mean disturbing the portfolio, triggering capital gains or exiting at an unfavourable time.
Loan Against Securities (LAS) offers an alternative. Instead of selling your investments, eligible securities can be pledged with a lender to raise funds against their value, subject to the applicable Loan-to-Value (LTV) ratio allowing you to unlock liquidity while continuing to hold your investments.
What is a Loan Against Securities?
A Loan Against Securities (LAS) is a secured borrowing facility where financial investments are pledged as collateral to obtain a loan or an overdraft facility.
The amount that can be borrowed depends on the type and value of the securities pledged. Importantly, not every security is necessarily accepted by every lender, and the LTV can differ significantly across asset classes.
Eligible securities may include:
- Listed equity shares
- Equity mutual funds
- Debt mutual funds
- Listed bonds and debentures
LAS is often structured as an overdraft facility, rather than a conventional term loan. This distinction can be particularly useful because interest is generally charged on the amount actually utilised rather than necessarily on the entire sanctioned limit.
Why Would You Consider LAS?
LAS allows investors to access liquidity without immediately liquidating their investments. For investors with substantial portfolios, this can offer several advantages:
1. Liquidity Without Disrupting the Portfolio
Instead of selling investments to meet a temporary cash requirement, securities can be pledged against the loan. This allows the investor to access funds while maintaining the underlying portfolio and its long-term allocation.
2. Potentially More Efficient Borrowing
Because the facility is secured against financial assets, the borrowing cost may be lower than that of unsecured credit, depending on the lender, securities and prevailing rates. The relevant comparison is therefore: cost of LAS vs. cost of liquidating investments vs. cost of alternative borrowing.
3. Flexibility Through an Overdraft
Many LAS facilities operate as overdrafts, allowing investors to draw only what they need and pay interest on the utilised amount. For example, against a ₹2 crore sanctioned limit, an investor may draw ₹75 lakh rather than borrowing the entire amount. This makes LAS particularly useful for short-term or uncertain funding needs.
4. Avoiding Premature Sale of Investments
Selling investments may trigger capital gains and related tax implications. With LAS, the securities are pledged rather than sold, allowing investors to access liquidity while remaining invested. However, LAS should not be viewed as a tax-saving strategy. The tax treatment of interest and the purpose of borrowing should be evaluated separately.
5. Preserving Long-Term Wealth
For a long-term investor, a temporary liquidity requirement does not necessarily need to result in selling a well-constructed portfolio. LAS provides an additional option to unlock portfolio value while maintaining investment continuity.
The Other Side of the Equation: Risks & Limitations
LAS may provide liquidity without selling investments, but pledging securities does not eliminate investment risk – it adds a layer of borrowing risk.
1. Market Falls Can Trigger Margin Shortfalls
If the value of pledged securities declines, the lender may reduce the permissible borrowing limit. The borrower may then need to provide additional collateral or repay part of the loan.
Portfolio falls → collateral value falls → borrowing capacity falls → additional funds may be required.
2. Interest Costs Continue Regardless of Return
Interest remains payable irrespective of portfolio performance. If investments decline while the loan continues to accrue interest, borrowing can materially erode overall returns.
3. Risk of Forced Sale
If required collateral coverage is not maintained, the lender may have the right to liquidate pledged securities.
This changes an important dynamic: When you own an investment outright, you decide when to sell. When it is pledged, a collateral shortfall can influence when it gets sold. This risk is particularly relevant for volatile equity portfolios.
4. Eligibility and LTV Constraints
Not every security qualifies for LAS, and lenders apply different loan-to-value (LTV) ratios depending on the asset. Therefore, a ₹5 crore portfolio does not necessarily provide ₹2.5 crore of borrowing capacity. The composition and eligibility of the portfolio matter.
A Simple Numeric Illustration
Consider Mr. A, with:
| Investment | Market Value |
|---|---|
| Equity Shares | ₹3.00 Cr |
| Equity Mutual Funds | ₹2.00 Cr |
| Total Portfolio | ₹5.00 Cr |
Assume an illustrative 50% LTV. Potential credit limit = ₹5 Cr × 50% = ₹2.5 Cr
If Mr. A needs ₹1 crore for a business requirement, he can pledge eligible securities and utilise ₹1 crore rather than selling investments.
- At an assumed interest rate of 9.5% p.a., the interest on ₹1 crore would be approximately ₹9.5 lakh per year, or ₹79,166 per month, if fully utilised throughout the year.
- If he uses the ₹1 crore for only six months, the interest would be approximately ₹4.75 lakh.
What Happens if the Market Falls?
Suppose the ₹5 crore portfolio falls by 20% to ₹4 crore. At the same 50% LTV, the borrowing capacity falls to ₹2 crore.
If Mr. A had utilised the entire ₹2.5 crore limit, he could face a ₹50 lakh collateral shortfall, requiring additional securities or partial repayment, depending on the lender’s terms.
This is the key LAS risk: when markets fall, the value of your collateral and therefore your borrowing capacity can fall with it. LAS is therefore best used as a disciplined liquidity-management tool, not a means of persistent leverage.
The Real Advantage of LAS: Preserving Compounding
Consider you have ₹5 crore investment portfolio who requires ₹2 crore. You have two choices:
Scenario 1: Redeem the Investments
- You redeem ₹2 crore and continue with the remaining ₹3 crore invested.
- At an assumed return of 12% p.a., the portfolio grows to ₹5.28 crore after five years.
Scenario 2: Take a Loan Against Securities
- Instead of selling, you take a ₹2 crore LAS and keep the entire ₹5 crore invested.
- At 12% p.a., the portfolio grows to ₹8.81 crore over five years.
- Assuming monthly payment of interest is done out of portfolio, value of portfolio after 5 years becomes ₹7.54 crore.
- Assuming an LAS interest rate of 9.5% p.a., the interest cost over five years would be ₹95 lakhs.
The Impact of Staying Invested:
| Particulars | Scenario 1: Redeem | Scenario 2: Take LAS |
|---|---|---|
| Initial Portfolio | ₹5.00 Cr | ₹5.00 Cr |
| Funds Required | ₹2.00 Cr | ₹2.00 Cr |
| Amount Redeemed | ₹2.00 Cr | Nil |
| Amount Borrowed | Nil | ₹2.00 Cr |
| Amount Remaining Invested | ₹3.00 Cr | ₹5.00 Cr |
| Assumed Return | 12% p.a. | 12% p.a. |
| Portfolio Value after 5 Years | ₹5.28 Cr | ₹7.54 Cr |
| LAS Interest Cost | Nil | ₹0.95 Cr |
| Repayment of Loan after 5 Years | Nil | ₹2.00 Cr |
| Net Value after 5 Years* | ₹5.28 Cr | ₹5.54 Cr |
Difference in net portfolio value: ₹26 lakhs
Selling ₹2 crore permanently reduces the capital available for compounding. LAS allows the investor to access temporary liquidity while keeping the larger investment base intact.
However, this is not a guaranteed spread or return. Investment returns are market-linked, while the interest obligation remains payable irrespective of portfolio performance. Taxes, fees, actual interest rates and changes in collateral value can further affect the outcome.
(*Illustrative calculation. Assumes simple interest on the full ₹2 crore for five years and ignores taxes, fees and other charges and interest payment is done from the portfolio. Actual LAS terms may differ.)
The key question is not “How much can I borrow?” but “How much can I borrow comfortably without compromising my financial resilience?” Used prudently, LAS can be a powerful liquidity-management tool; used excessively, it can turn a temporary liquidity need into a financial risk.
The calculations above are illustrative. Investment returns are market-linked and not guaranteed. Past performance may or may not be sustained in the future.
Conclusion
Loan Against Securities is not about borrowing more - it is about using existing wealth more intelligently.
For HNIs and business owners, LAS can provide liquidity without unnecessarily disrupting a long-term investment portfolio. However, the right choice depends on the purpose and duration of borrowing, interest rate, portfolio composition, liquidity needs, tax implications and the investor’s overall risk capacity.
By CA Prajakta Patel, Research & Compliance Manager, Ascent Financial Solutions Pvt. Ltd. This article is for educational purposes only and does not constitute investment advice or a recommendation.
