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) is one alternative. It lets you unlock the value of your existing investments, such as 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.
This guide covers everything you need to know about LAS: how it works, what you can pledge, the benefits and the risks.
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 an illustrative 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.
- 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, depending on the lender, the repaid amount may be available to draw again 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.
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smallcase offers a Loan Against Mutual Funds and Loan Against Stocks in association with its RBI-regulated lending partners. The process is fully digital. You can check your eligible limit, select eligible mutual funds or stocks, complete KYC, set up an auto-debit mandate and sign the loan agreement before the funds are credited to your bank account. You then sign the loan agreement, after which the funds are credited to your bank account. Checking your credit limit does not affect your CIBIL score. When you apply and sign the loan agreement, a hard CIBIL check happens, which can impact your score.
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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.
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.
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.
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 redeem, sell or switch pledged units while they are under lien. You can unpledge units to the extent you have repaid the loan. This restricts your ability to exit the investment while the units stay pledged, 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.
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
You can usually repay the principal at any time, in full or in part. Many lenders do not charge for foreclosure or prepayment, but check your lender’s terms. Depending on the lender, the repaid amount may be available to draw again without reapplying, making it suitable for recurring or unpredictable liquidity needs.
Fully Digital and Paperless
LAS can cost less than unsecured credit, but it is not without risk. Borrowers should understand these clearly before pledging their investments.
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.
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 they are under lien, you lose the ability to exit those positions unless you repay part of the loan and unpledge them 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 that liability.
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 can cost less than many unsecured options.
Recurring or Variable Needs
Because LAS works as a revolving credit line that, depending on the lender, 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 |
| 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 one way to access funds without selling your investments. 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.
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.
Disclaimer: This article is for educational and informational purposes only and should not be considered financial, investment or lending advice. Loan eligibility, approval, interest rates, credit limits, charges and other terms are subject to the lender’s policies, applicable regulations and the value of the securities pledged. Please review the applicable loan agreement, terms and conditions, and associated risks carefully before borrowing. If you are considering a Loan Against Securities, you can learn more about our LAS and LAMF offerings in detail at the help centre.
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Frequently Asked Questions on Loan Against Securities (LAS)
LAS is a secured loan. The borrower pledges financial assets, such as 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.
If the value of pledged securities falls and the loan crosses the permitted LTV, the lender may ask you to repay part of the outstanding amount or pledge additional eligible securities. If the shortfall is not addressed, the lender may liquidate pledged assets as per the loan agreement.
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 loan amount depends on the current market value of eligible mutual funds and the applicable loan-to-value ratio. Equity and debt funds may have different LTV limits, while the final sanctioned amount also depends on the lender’s policy.
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, most lenders allow partial prepayment or complete foreclosure of a loan against mutual funds. However, foreclosure charges, minimum repayment requirements and other conditions can vary, so borrowers should review the lender’s terms.
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 while they are under lien. For demat holdings, the lien is marked through the depository; for non-demat mutual fund units, through the registrar. You can unpledge part of your units to the extent you have repaid the loan, and the lien on the remaining units is removed once the loan is repaid in full.
NRI eligibility varies by lender. Some lenders may offer loans against securities to NRIs subject to residency status, KYC requirements, eligible holdings and applicable RBI or FEMA regulations.
A LAMF is secured by mutual fund units, so eligibility often depends heavily on the pledged collateral. Checking your eligible limit usually does not involve a hard credit check. When you apply and sign the loan agreement, lenders may run a hard CIBIL check, which can affect your score.
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.
Funds may be ineligible if they are under a lock-in period, already pledged, held in an unsupported mode or excluded from the lender’s approved scheme list. Eligibility differs across lenders and can change over time.
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. It is usually calculated daily on the amount outstanding and collected monthly, so if you repay part of the principal, your interest reduces from that point.
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 when the funds are used for personal needs. If the funds are used for business, the tax treatment may differ, so consult a tax professional.
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.
A top-up may be available if the value of eligible pledged securities supports a higher credit limit or additional securities are pledged. The revised amount remains subject to applicable LTV limits and lender approval. Top-up availability depends on your lender, so check with your lender before you apply for a top-up.
A LAMF account can generally be closed after repaying all outstanding principal, interest and applicable charges. Once the lender confirms closure, the lien on the pledged mutual fund units is released.
