What is Loan Against Securities and How Does It Work?
There are times when you need funds quickly, to handle a financial emergency, seize a business opportunity, or bridge a cash-flow gap. Selling your investments may seem like the obvious move, but it often means exiting at the wrong time, triggering capital gains tax, or disrupting long-term goals you have been building toward.
A Loan Against Securities (LAS) offers a smarter alternative. It lets you unlock the value of your existing investments, stocks, mutual funds, and bonds by pledging them as collateral, without actually selling them. Your portfolio stays invested, continues to earn returns, and you get the liquidity you need.
In this guide, we cover everything you need to know about LAS: how it works, what you can pledge, eligibility, fees, risks, and how to apply on smallcase.
How Does a Loan Against Securities Work?
LAS operates on an overdraft or credit line model; you are given a credit limit based on the value of your pledged securities, and you can draw from that limit as needed. Unlike a term loan, where you receive and repay a fixed amount, a credit line lets you withdraw only what you need and pay interest only on that portion.
Here is how the process works end-to-end:
- Security Valuation: The lender assesses the current market value of the securities you wish to pledge and verifies whether they are on the approved list of eligible instruments.
- Credit Limit Calculation: A Loan-to-Value (LTV) ratio is applied to the market value to determine how much you can borrow. For example, if you pledge equity mutual funds worth ₹2 lakh at a 45% LTV, your credit limit would be ₹90,000.
- Pledging and Lien Marking: The securities are lien-marked in favour of the lender. They remain in your demat account or mutual fund folio; you do not hand them over. You continue to earn returns on them.
- Disbursement: Once the pledge is confirmed and the loan agreement is digitally signed, the approved loan amount is credited to your bank account, often within 2 working hours on smallcase.
- Repayment and Reuse: You pay interest only on the amount you withdraw, not the full credit limit. You can repay the principal at any time, and once repaid, the credit line is restored for reuse, without reapplying.
- Loan Closure: Upon repayment of all dues, the lien is removed, and your securities are fully released.
Example: You pledge equity mutual funds worth ₹2,00,000. At 45% LTV, your credit limit is ₹90,000. You withdraw ₹50,000. Monthly interest is charged only on ₹50,000, not the full ₹90,000.
How to Apply for LAS on smallcase?
- Log in to smallcase Credit: Visit smallcase Credit and click on Against Stocks to check your credit limit.
- Check eligible stocks: View your Zerodha demat holdings and see which stocks and ETFs are available for pledging.
- Select stocks to pledge: Choose the securities you want to use as collateral and confirm your credit limit.
- Link your bank account: Add your bank details for disbursement and set up an e-mandate for monthly interest auto-debit.
- Pledge your stocks: Selected shares are lien-marked through the depository while remaining in your Zerodha demat account.
- Sign the loan agreement: Review the terms, verify with OTP, and sign the agreement online.
- Receive the loan amount: The amount is credited directly to your linked bank account after signing.
Types of LAS on smallcase
smallcase offers two forms of Loan Against Securities, each suited to a different type of collateral you may hold.
Loan Against Mutual Funds (LAMF)
LAMF lets you pledge your existing mutual fund units across equity, debt, or hybrid categories as collateral to obtain a credit line. Over 8,000 approved MF schemes are eligible across the platform.
Key highlights for LAMF on smallcase:
| Parameter | Details |
| Minimum loan amount | ₹25,000 |
| Loan tenure | 36 months |
| Interest rate | Starting at 9.99% p.a. (on outstanding amount only) |
| Disbursement time | Within 2 working hours |
| Eligible age | 18 – 70 years |
| Foreclosure/prepayment charges | None |
| Credit score impact | None; no hard CIBIL inquiry |
| Processing fee | 1% of the loan amount (subject to a minimum and maximum cap) + GST |
Loan Against Stocks (LAS)
A Loan Against Stocks lets you pledge your equity shares and ETFs held in your demat account as collateral. This allows you to meet financial needs without redeeming your equity holdings or losing your position in the market.
Which Securities Can You Pledge?
Lenders accept a range of financial instruments as collateral under LAS. The eligibility of specific instruments depends on the lender’s approved list and the regulatory guidelines applicable at the time of application.
Equity Shares
Listed equity shares held in a demat account are among the most commonly pledged securities. They offer high liquidity, but because share prices can be volatile, the assigned LTV ratio tends to be more conservative.
Mutual Funds
Both equity and debt mutual fund units are accepted as collateral. The credit limit is a percentage of the current Net Asset Value (NAV) of the pledged units. Debt funds generally attract a higher LTV than equity funds, given their relatively lower price volatility.
Exchange-Traded Funds (ETFs)
ETFs held in demat form are also eligible as collateral in many LAS arrangements, provided they are on the lender’s approved list.
Bonds and Debentures
Government bonds, corporate bonds, and non-convertible debentures held in demat form can be pledged. These instruments typically attract a higher LTV given their fixed-income nature.
Insurance Policies
Certain life insurance policies, such as ULIPs and traditional endowment plans with a surrender value, are accepted by some lenders as eligible collateral.
What is NOT Eligible
Not all securities or fund types qualify. Funds still under a lock-in period (such as ELSS within the mandatory 3-year lock-in), funds already pledged with another lender, and schemes not included in the lender’s approved list are excluded. Holdings under joint account structures are also typically ineligible for smallcase’s LAMF product.
LTV Ratio and Credit Limit
The Loan-to-Value (LTV) ratio is the percentage of your pledged security’s market value that the lender is willing to extend as credit. It is not fixed across all securities; it varies by instrument type and the lender’s risk assessment. Here is how LTV works for LAMF on smallcase:
| MF Type | LTV (Credit Limit) | Maximum Loan-to-Value |
| Equity mutual funds | 45% of the current market value | 45% |
| Debt mutual funds | 75% of the current market value | 85% |
Example (Equity MF): ₹2,00,000 pledged → credit limit = ₹90,000
Example (Debt MF): ₹2,00,000 pledged → credit limit = ₹1,50,000
If your credit limit shows ₹0, it is likely because all your eligible holdings are under a lock-in period, already pledged elsewhere, or not on the lender’s approved scheme list.
Eligibility Criteria for LAS
The eligibility requirements for LAS are straightforward compared to most loan products. There is no need to submit income documents or undergo a hard credit check on smallcase’s LAMF product. The key criteria are as follows:
- Residency and Age: The applicant must be a resident Indian, aged between 18 and 70 years. NRIs are currently not eligible for LAMF on smallcase.
- Investment Holdings: You must hold mutual fund investments in schemes that are on the lender’s approved list. For Loan Against Stocks, you must hold eligible equity shares or ETFs in a demat account.
- Identity and Contact Details: A valid PAN card is required. The email ID and phone number used for the application must be registered with your mutual fund folios, as they are required to accurately retrieve and verify your holdings.
- Account Structure: Joint account holders are not eligible for LAMF on smallcase. The loan can only be applied for by the sole account holder.
- Credit Score: No hard CIBIL inquiry is made at the time of application. Checking your credit limit on smallcase does not affect your credit score.
Impact on Your Investments After Pledging
A common concern among borrowers is whether pledging securities affects their portfolio’s performance or their ability to benefit from it. Here is a clear breakdown of what changes and what stays the same.
What Stays the Same
Your pledged units remain in your folio or demat account; they are not transferred to the lender. You continue to earn returns, dividends, and interest income on them throughout the loan tenure, exactly as if they were unpledged.
What Changes
You cannot sell or redeem pledged units until the loan is fully closed. This restricts your ability to exit the investment during the loan period, which is an important consideration if you are pledging equity-oriented funds.
New Investments are Unaffected
Pledging existing units does not prevent you from making fresh investments in the same fund. Any new units you purchase are not subject to the pledge and remain fully accessible.
Tax Treatment
Pledging does not trigger a tax event on its own. Capital gains tax would only apply if the lender is forced to liquidate the pledged units due to a default or an LTV breach.
Partial Unpledging
On LAMF via smallcase, partial unpledging is not available. All pledged units are released only when the full outstanding loan is repaid, and the loan account is closed.
Fees and Charges
Understanding the complete cost structure before applying is essential. Below is the fee structure for LAMF on smallcase. Charges for Loan Against Stocks may vary; please refer to the respective product page for current details.
| Fee Type | Amount |
| Interest rate | Starting at 9.99% p.a. (charged on outstanding principal only) |
| Processing fee | 1% of the loan amount (subject to minimum and maximum caps) + GST |
| Late payment interest | 1.5% per month on overdue interest |
| Bounce charges | Applicable per mandate bounce as per lender policy |
| Pledge/unpledge charges | Applicable per security as per the depository and lender norms |
| Foreclosure/prepayment | NIL |
| Lien removal (post-loan closure) | NIL |
Interest is calculated only on the outstanding principal, not the full credit limit.
Formula: Outstanding Amount × (Annual Rate ÷ 12) ÷ 100
Example: ₹1,00,000 outstanding at 9.99% p.a. → monthly interest ≈ ₹833
Benefits of a Loan Against Securities
LAS offers several structural advantages over other credit products, particularly for investors who have built a portfolio over time and need liquidity without disturbing it.
Stay Invested, Stay Liquid
The most significant benefit of LAS is that you do not have to sell your portfolio to raise funds. Your investments continue earning returns while the cash you need sits in your bank account. This means you avoid the opportunity cost of exiting the market at what may be the wrong time.
Lower Interest Rates
Because the loan is secured by your investments, lenders charge significantly lower rates than unsecured products like personal loans or credit cards. The interest burden over the loan period is meaningfully lower, especially for investors with high-quality collateral, such as debt mutual funds.
Pay Interest Only on What You Use
LAS works like an overdraft. If your credit limit is ₹1 lakh but you withdraw only ₹30,000, you pay interest only on ₹30,000. The unused portion of your credit limit does not attract any interest charges.
Flexible Repayment with Zero Foreclosure Charges
You can repay the principal at any time, in full or in part, without any prepayment penalties. Once repaid, the credit line is restored, and you can borrow again, without reapplying, making it suitable for recurring or unpredictable liquidity needs.
No Credit Score Impact at Application
On smallcase’s LAMF, the application process does not involve a hard CIBIL inquiry. Your credit score is not affected when you check your credit limit or proceed with the loan.
Fully Digital and Paperless
The entire journey, from importing your MF holdings to receiving funds, is 100% online. No physical documents, no branch visits, and no long processing windows. Funds are typically credited within 2 working hours of completing the application.
What are the Risks of LAS?
LAS is a cost-effective credit product, but it is not without risk. Borrowers should understand these clearly before pledging their investments.
Market Volatility and LTV Breach
If the market value of your pledged securities falls significantly, the outstanding loan may exceed the allowed LTV threshold. When this happens, the lender notifies you to repay the excess amount and bring the LTV back within permissible limits.
Example: You pledge equity mutual funds worth ₹1,000 and borrow ₹450 (45% LTV). If the fund value drops to ₹900, the permissible limit becomes ₹405. You would need to repay ₹45 to stay within bounds.
Margin Call and Forced Liquidation
If you do not respond to an LTV breach notification within the stipulated period, 7 days on LAMF via smallcase, the lender may liquidate a portion of your pledged securities to recover the outstanding amount. This forced sale could occur at an inopportune time in the market.
Interest Obligation Regardless of Market Performance
Monthly interest payments are due whether or not your portfolio is performing well. If markets fall sharply, you may be managing a declining portfolio value while maintaining an ongoing interest obligation, a situation that requires careful financial planning.
Restricted Investment Flexibility During Loan Tenure
Since pledged units cannot be sold or redeemed while the loan is active, you lose the ability to exit those positions if market conditions change. This is particularly relevant for equity-oriented funds, which can be more volatile.
When Should You Consider LAS?
LAS is well-suited for specific financial situations. It works best when your need is short-term, and you have a clear plan to repay. You can consider LAS when:
Liquidity Without Selling
If you hold investments you have built over the years, selling them to meet a short-term need is often counterproductive. LAS lets you access cash without disturbing those positions.
Tax Impact
Redeeming mutual funds or selling shares after a period of strong performance can result in a large capital gains tax outflow. A loan lets you defer or avoid that liability entirely.
Markets Downturns
When your portfolio is temporarily undervalued, selling to raise funds crystallises a loss that could have been recovered over time. LAS allows you to wait for a recovery while still accessing the funds you need.
Cost of Borrowing
LAS interest rates are typically lower than personal loans and significantly lower than credit card interest rates. For borrowers with eligible securities, it is often the most cost-efficient source of short-term credit.
Recurring or Variable Needs
Because LAS works as a revolving credit line that you can repay and redraw as needed, it suits situations where you may need to access funds multiple times over a period rather than taking a single large disbursement.
LAS vs. Other Loan Types
Choosing the right credit product depends on your financial profile and the purpose of the borrowing. Here is how LAS compares to the most common alternatives:
| Feature | Loan Against Securities | Personal Loan | Home Loan |
| Collateral required | Yes (financial investments) | No | Yes (property) |
| Interest rate | Lower (secured) | Higher (unsecured) | Lower (secured, long tenure) |
| Loan amount | Based on the LTV of pledged securities | Based on income and credit score | Based on property value |
| Repayment structure | Flexible credit line/overdraft | Fixed EMIs | Fixed EMIs |
| Processing time | Often within hours (fully digital) | 1–3 days | Several weeks |
| CIBIL check | No hard inquiry (for LAMF on smallcase) | Hard check required | Hard check required |
| Best suited for | Short-term liquidity without exiting investments | Personal expenses without collateral | Property purchase or construction |
The key distinction is purpose and structure. LAS is not a replacement for a home loan or a long-term credit facility; it is a short-term, revolving credit tool best used by investors who want to borrow against what they already own.
To Wrap It Up
A Loan Against Securities is a practical, cost-effective way to access funds without disrupting your investment journey. Whether you choose to pledge mutual funds or stocks, the core principle is the same: your portfolio stays invested, you pay interest only on what you use, and you repay on your own terms, with no foreclosure charges.
On smallcase, you can explore LAMF and Loan Against Stocks, both fully digital, paperless, and designed for investors who would rather borrow against their portfolios than liquidate them.
As always, review the terms carefully, understand the risks around LTV breaches and margin calls, and consider consulting a financial advisor if you are unsure about the right approach for your situation.
Frequently Asked Questions on Loan Against Securities (LAS)
LAS is a secured loan. The borrower pledges financial assets, stocks, mutual funds, and bonds as collateral to the lender. Because the loan is backed by real assets, the lender’s risk is lower than with unsecured products, which is why interest rates on LAS are generally lower than those on personal loans or credit cards.
Loan Against Securities (LAS) is the broader category that covers pledging any eligible financial instrument, such as shares, mutual funds, bonds, and ETFs, as collateral. Loan Against Mutual Funds (LAMF) is a specific subset of LAS where only mutual fund units are used as collateral. On smallcase, LAMF covers 8,000+ approved MF schemes across equity, debt, and hybrid categories.
If the market value of your pledged securities falls and the outstanding loan exceeds the allowed LTV limit, the lender will issue a margin call, a notification asking you to repay the excess amount. On LAMF via smallcase, you have 7 days to respond. If the shortfall is not addressed, the lender may liquidate a portion of your pledged securities to recover the outstanding amount.
Disclaimer: Market-linked securities carry inherent price risk. Forced liquidation during a market downturn may result in losses. Please assess your risk tolerance carefully before pledging equity-oriented securities.
The minimum loan amount is ₹25,000. Your credit limit is calculated by applying the applicable LTV ratio to the current market value of your eligible pledged funds, 45% for equity mutual funds and 75% for debt mutual funds. The maximum credit limit depends on the total value of your eligible holdings at the time of application.
No. Pledged mutual fund units remain in your folio throughout the loan tenure and continue to earn returns and dividends exactly as they would if unpledged. The lien marking only restricts your ability to sell or redeem those units; it has no impact on the investment’s performance or any distributions it generates.
Yes. There are no foreclosure or prepayment charges on LAMF via smallcase. You can repay the principal at any time, in full or in part. Once repaid, your credit line is restored, and you can withdraw the repaid amount again without submitting a new application, subject to a minimum withdrawal of ₹1,000.
Lien marking is the process by which a restriction is placed on your pledged securities in favour of the lender. The securities remain in your folio or demat account; they are not transferred, but you cannot sell or redeem them until the lien is released. The lien is automatically removed once the loan is repaid in full and the account is closed.
No. The LAMF product on smallcase is currently available only to resident Indians. NRIs are not eligible to apply at this time.
No hard CIBIL inquiry is made when you apply for LAMF on smallcase. Checking your credit limit does not affect your credit score. However, your repayment behaviour after disbursement may be reported to credit bureaus in line with the loan agreement terms.
Disclaimer: Credit reporting practices are governed by the loan agreement and applicable regulations, which are subject to change. Please review the agreement for the most current terms.
The following categories are generally not eligible: ELSS funds still within the mandatory 3-year lock-in period, funds already pledged with another lender, and schemes not included in the lender’s approved list. Joint account holdings are also ineligible for LAMF via smallcase. On smallcase, only mutual fund units held in demat form through a Zerodha account are currently supported. Units held in non-demat folio form are not eligible at this time. If your credit limit shows ₹0, it is likely because all your current holdings fall into one or more of these categories.
Yes. Pledging your existing mutual fund units does not restrict you from making fresh investments in the same scheme. Any new units you purchase are not subject to the pledge and remain freely redeemable. Only the specific units lien-marked at the time of pledging are restricted.
Interest is charged only on the outstanding principal, not the full credit limit. The formula is: Outstanding Amount × (Annual Rate ÷ 12) ÷ 100. For example, with ₹1,00,000 outstanding at 9.99% p.a., the monthly interest would be approximately ₹833. If you repay part of the principal, your interest for the following month will be reduced proportionately.
A loan against securities is a debt instrument and is not treated as income; it is not taxable in the borrower’s hands. However, if the lender liquidates pledged securities due to non-repayment or an LTV breach, capital gains tax may apply on the sale of those units. Interest paid on LAS is generally not tax-deductible unless the borrowed funds are used for a qualifying business or investment purpose.
Disclaimer: Tax treatment depends on individual circumstances and applicable laws, which are subject to change. This should not be treated as tax advice. Please consult a qualified tax professional for guidance relevant to your situation.
The primary objective is to access liquidity without liquidating your investments. LAS is particularly useful for meeting immediate financial needs, emergencies, business requirements, and short-term cash-flow gaps, while keeping your portfolio intact and continuing to benefit from its long-term growth potential.
To close the loan, repay the full outstanding principal and any accrued interest using the ‘Repay Cash’ option on the Loan Dashboard in the smallcase app. Once all dues are cleared, raise a closure request through the Loan Dashboard or via smallcase’s customer support. After the loan is confirmed as closed, the lien on your pledged mutual fund units is removed, and the units are fully released.
