Things to know before taking loan against stocks, mutual funds

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NEW DELHI: Loan against securities is not among the quickest, but is among those which have a lower interest rate. Lenders offer loan against securities (LAS) at two-three percentage points higher than their home loan rates.

A borrower can consider the option instead of liquidating investments. Your investments will continue to grow while they are pledged with a lender. You will also continue to receive dividends, bonuses, etc., during the loan period.

You can pledge securities such as shares, equity or debt mutual funds, insurance policies and bonds to raise money.

Lenders typically have a list of securities they are willing to accept, which is available on their websites. For example, in the case of stocks, a bank may accept only the top 50 or top 100 companies. In the case of mutual funds and life insurance policies, they could have a specified list of companies.

In the case of equities, a lender will offer 50-60% of the value of the securities as a loan. It could be higher in the case of debt funds or bonds. Besides, lenders can ask for additional securities if the value of securities falls during the loan tenure.

Beware of the charges on LAS. Besides processing charges, a lender can charge stamp duty on the loan agreement, pledge creation fee, and so on.

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Loans against securities.

Some lenders such as HDFC Bank and Yes Bank offer loan against stocks and mutual funds online. The process is entirely paperless.

Do remember these are short tenure loans, typically with a tenure of up to 36 months. Some lenders offer flexible repayment option, where borrowers can pay interest every month and principal at the end of the loan tenure.

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