Why Investors Are Turning to Loan Against Securities
When a genuine cash need shows up — a medical emergency, a business opportunity, a large one-time expense — the instinctive reaction for many investors is to sell part of their equity or mutual fund portfolio. This is often the costliest option available, since it triggers capital gains tax, breaks the compounding curve you have built over years, and can force you to sell at an inopportune point in the market cycle. A loan against securities lets you unlock liquidity from your existing shares, mutual funds, or bonds without selling a single unit, which is why it has become a popular middle ground between a personal loan and liquidating investments outright.
This guide covers exactly which securities qualify, how lenders calculate your eligible loan amount through margin and haircut rules, what interest rates to expect, and what happens if markets move against you while the loan is outstanding.
What Counts as an Eligible Security
Not every investment in your portfolio can be pledged. Lenders — mostly banks and NBFCs registered with the RBI, alongside broking-affiliated lending arms — maintain an approved list of eligible securities that is reviewed periodically based on liquidity and volatility.
- Equity shares: Only shares from an approved list of typically large-cap and select mid-cap companies held in dematerialised form qualify. Illiquid, low free-float, or highly volatile stocks are usually excluded. Compare current terms across lenders on the loan against securities marketplace before shortlisting one.
- Mutual fund units: Both equity and debt mutual fund schemes are generally accepted, provided they are not under a statutory lock-in such as ELSS funds during their three-year lock-in period.
- Bonds and government securities: Government bonds, sovereign gold bonds, and select corporate bonds are accepted, usually at more favourable margin terms than equities because of lower price volatility.
- Insurance policies: Some lenders extend the facility against traditional life insurance policies with an accumulated surrender value, though this is a smaller segment of the product.
Understanding Margin and Haircut Rules
The single most important number in this product is the haircut, which is the discount a lender applies to the current market value of your security before arriving at your loan eligibility. Equities, being more volatile, attract a higher haircut — commonly in the 50% range, meaning you can typically borrow up to around half the market value of pledged shares. Debt mutual funds and government securities carry lower volatility and therefore a smaller haircut, often between 10% and 20%, translating into a higher effective loan-to-value.
These margin requirements are not static. Lenders revalue the pledged portfolio periodically, sometimes daily for equities given exchange price feeds, and adjust your available limit accordingly. A sharp market correction can shrink your usable limit even if you have not drawn any additional funds, which is the single biggest behavioural risk borrowers underestimate with this product.
A Simple Worked Example
| Security Pledged | Market Value | Typical Haircut | Approximate Loan Eligibility |
|---|---|---|---|
| Large-cap equity shares | ₹10,00,000 | 50% | ₹5,00,000 |
| Debt mutual fund units | ₹10,00,000 | 15% | ₹8,50,000 |
| Government bonds | ₹10,00,000 | 10% | ₹9,00,000 |
These figures are illustrative; actual haircuts vary by lender, by the specific security, and by prevailing market conditions, so always confirm current terms before pledging.
Interest Rates and How They Are Charged
Loan against securities is typically offered as an overdraft facility linked to your demat or mutual fund holdings rather than a fixed term loan. Interest rates commonly range from around 9% to 15% per annum depending on the lender, the security type, and your relationship with the institution, generally cheaper than an unsecured personal loan because the lender holds readily liquidable collateral. If you want to see how the maths of an EMI-based facility would compare instead, the EMI calculator is a useful way to model a term-loan alternative side by side. The overdraft structure means interest accrues only on the amount you actually draw and only for the days it remains outstanding — if you sanction a ₹10 lakh limit but withdraw only ₹2 lakh for fifteen days, you pay interest on just that ₹2 lakh for those fifteen days, not on the full limit.
Eligibility Criteria
Eligibility is comparatively simple since the loan is fully secured by the pledged portfolio.
- Age: Generally 18 years and above, sometimes with an upper age cap depending on the lender.
- Portfolio requirement: A minimum pledged value is often required, commonly starting around ₹50,000 to ₹1 lakh depending on the lender's policy.
- KYC and demat account: A valid demat account with the securities already held in your name, along with standard KYC documents like PAN and Aadhaar.
- Credit score: Since the loan is fully secured, credit score requirements are typically more lenient than for unsecured credit, though a reasonable CIBIL score still helps with pricing and limit sizing.
The Margin Call: What Actually Triggers It and What You Should Do
A margin call occurs when the market value of your pledged securities falls enough that your outstanding loan now exceeds the permitted loan-to-value ratio after the applicable haircut. The lender will typically notify you and give a short window, often between 24 and 72 hours, to restore the required margin either by pledging additional eligible securities, depositing cash to reduce the outstanding loan, or partly repaying the facility. If you do not respond within this window, most loan agreements permit the lender to sell enough of your pledged securities in the open market to bring the account back within limits, without seeking further consent, which can crystallise losses at the worst possible time in a falling market.
Because of this risk, financial planners generally recommend borrowing well below your maximum eligible limit, keeping a buffer against market volatility rather than drawing the facility to its edge. If you are comparing this option against simply pledging mutual fund units specifically, our detailed loan against mutual funds and shares guide breaks down lien-marking timelines and NBFC-specific processes in more depth.
How It Compares to Other Secured Borrowing Options
Loan against securities sits alongside gold loans and loan against property in the secured lending category, but with a key difference: your portfolio continues to participate in market movements, dividends, and compounding while pledged, unlike gold or property which simply sit as static collateral. For a broader view of how secured products stack up against unsecured borrowing on cost and flexibility, the comparison in secured vs unsecured loans is a useful reference. If your funding need is smaller and you would rather avoid market-linked collateral risk altogether, it is also worth checking current offers on the personal loan marketplace before deciding which route fits your situation better.
Final Word
Loan against securities is one of the more cost-efficient ways to access liquidity without disturbing a long-term investment portfolio, provided you respect the margin buffer and understand that a market downturn can shrink your available limit overnight. Before pledging, always confirm the current approved securities list, applicable haircut, and margin-call terms directly with the lender, since these are revised periodically based on market conditions and regulatory guidance.