Say your child's college fee of ₹1,20,000 is due in ten days. Your bank balance is ₹30,000, but you hold ₹4 lakh in mutual funds and shares. The market is down this month, so selling now would make the loss final. Many people in this situation think they must either sell at a bad time or take an expensive personal loan. A third option exists where you can offer your investments as security and borrow against them, while you keep ownership and stay invested for the long run.

How Can Investments Cover Your Cash Needs?

With a loan against securities, you pledge eligible shares, mutual funds, or bonds as collateral to a lender. Security means the lender holds a claim on them until you repay and can sell them if you stop paying. If your holdings are worth ₹5 lakh and a lender offers up to 50%, you could receive up to ₹2.5 lakh. You repay it in installments or at the end of the term, depending on the lender. The lender sets the exact percentage, interest rate, and charges, and approval is never guaranteed.

Equity simply means shares of companies. A loan against equity lets you offer shares as security. These sit in your demat account, which is the account that holds your shares in electronic form. Lenders usually prefer shares of large, well-known companies over small ones that trade rarely. The prices of shares are always changing every day; hence, the amount of money available for borrowing depends on the prices available at the particular moment. In case the prices of shares fall considerably, the bank might ask you to deposit more shares or even pay back some of the money borrowed.

Which Investments Can You Use?

Many people also hold mutual funds, which collect money from many investors and are run by fund managers. The process of taking a loan against MF (mutual funds) is done in such a way that the mutual fund units are pledged as collateral with the lender, but remain registered under your name. Lenders prefer mutual funds that consist of investments in bonds and stable companies.

What Should You Check Before You Borrow?

Bonds represent the loan you give to a government or firm in exchange for regular interest payments. However, there are some lenders who may allow a loan against bonds; this depends on the policies of the lender as well as whether they allow such transactions or not. Remember that in the case of a loan from these institutions, the lender makes the decisions, not the app.

Here are some that you must review:

• Interest rate and any fees the lender charges
• Repayment period and monthly payment amount
• What happens if your share or fund values drop
• Whether you can repay early without a penalty
• Conclusion

Your investments will assist you to cover emergencies without having to sell at unfavorable terms. Stocks, mutual funds, and bonds may each be used as collateral, and it is the responsibility of the lender to determine how much money you can borrow and the terms. Only borrow what you will be comfortable with paying back, and have some room to accommodate a possible decrease in prices. Understand all the conditions presented by the lender before borrowing.