Loan Against Securities vs Loan Against Mutual Funds
Compare Loan Against Securities and Mutual Funds to unlock liquidity without selling your long-term investments.
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A business opportunity, or personal needs, quick access to funds is often necessary. But selling long-term investments may not always be the smartest choice, especially when you have alternatives like Loan Against Securities (LAS) or Loan Against Mutual Funds (LAMF).
Both LAS and LAMF allow you to raise funds without liquidating your investments, preserving your potential for future gains. But which one is right for you? In this blog, we’ll break down the key differences, benefits, limitations, and practical considerations to help you make an informed decision.
What is a Loan Against Securities (LAS)?
A Loan Against Securities is a facility where financial institutions lend money against listed securities that you own, such as shares, bonds, ETFs, or government securities. Your securities act as collateral, and you can continue to earn dividends or interest from them, depending on the terms of the loan.
Eligible Securities for LAS:
Equity shares (from approved companies)
Non-convertible debentures
Bonds (government or corporate)
ETFs (Exchange-Traded Funds)
What is a Loan Against Mutual Funds (LAMF)?
A Loan Against Mutual Funds, on the other hand, allows you to pledge your mutual fund units to borrow money. Like LAS, your investments remain intact while you receive a credit line or term loan based on the Net Asset Value (NAV) of the units.
Eligible Mutual Funds:
Equity mutual funds
Debt mutual funds
Hybrid mutual funds (subject to lender policies)
Benefits of Loan Against Securities (LAS)
Retain Ownership: You don’t sell your securities. This helps in long-term wealth compounding.
Cost-Effective: Interest rates are usually lower than personal loans or credit cards.
Liquidity Without Liquidation: Ideal if you anticipate asset appreciation.
Flexibility: Withdraw only what you need from the sanctioned amount.
Ideal For:
Investors with a portfolio of listed shares or bonds.
Those looking for short-term liquidity without altering long-term financial plans.
Benefits of LAMF
Quick Processing: Digital platforms allow fast pledging, often with same-day disbursal.
Higher LTV on Debt Funds: Debt mutual funds tend to offer higher loan values due to their lower volatility.
Wide Accessibility: Most mutual funds are held in digital form, making processing easier.
No Demat Requirement: Unlike shares, mutual funds can be held in statement (non-Demat) mode and still qualify.
Ideal For:
Investors with a sizable mutual fund corpus.
Those preferring hassle-free online pledging and disbursement.
Risks and Considerations
1. Market Risk:
LAS involves equity market fluctuations. A significant dip may trigger a margin call.
LAMF risk depends on the type of mutual fund. Debt funds are safer; equity funds can be volatile.
2. Margin Calls:
Both LAS and LAMF may require top-ups or partial repayments if asset value falls.
This can strain finances, especially during downturns.
3. Cost of Borrowing:
While cheaper than unsecured loans, the interest rate still matters. Typically, 9%–14% per annum.
There may also be processing fees, renewal charges, and prepayment penalties.
4. Loan Tenure and Repayment:
Check the repayment structure—some loans are overdraft-style (pay interest only on used amount), while others are EMI-based.
When to Choose LAS
You have a well-diversified equity or bond portfolio.
Your securities are already in Demat format.
You expect asset value to increase and don’t want to sell.
You are comfortable managing margin risks and can monitor your portfolio.
When to Choose LAMF
Your investments are primarily in mutual funds.
You prefer online processes and fast disbursal.
You want a slightly higher LTV (especially with debt MFs).
You want to avoid Demat-related processes or documentation.
Tax Implications
The good news is that loans against both securities and mutual funds do not trigger capital gains tax since the ownership doesn’t change.
However, if you default and the institution sells the pledged assets, capital gains tax will apply based on acquisition and sale price.
Final Thoughts
Both Loan Against Securities and Loan Against Mutual Funds are smart ways to unlock the value of your investments without selling them. The right choice depends on your investment type, urgency, comfort with risk, and administrative preferences.
If you’re a traditional investor with Demat shares or bonds, LAS offers better flexibility. If you’re digitally inclined and heavily invested in mutual funds, LAMF provides convenience with decent leverage.
Regardless of the route, remember that it’s still a loan, not free money. Assess your repayment ability, compare lender terms, and monitor your pledged assets carefully.
