An individual in need of funds to address their short-term financial needs can look at seeking a loan against securities. Pledging or borrowing against securities, such as stocks, bonds, mutual funds, and other securities, as collateral to secure loans from financial institutions or lenders.
While mutual funds and shares are relatively highly liquid assets, it takes at least a day or more to sell the security and gain money in the bank account.
On the other hand, availing a loan against these securities is a comparatively quicker process and, besides the cost incurred during redemption in taxes, exit loads, etc are also taken care of.
These assets act as collateral for lenders thereby reducing their risk in the eventuality of a loan defaultment.
In addition, instead of selling securities to raise funds, pledging lets an individual retain ownership of their assets. Thus ensuring the investor continues to benefit from any potential future rise in the value of such assets.
Besides, one of the most significant benefits of pledging is lower interest rates compared to other types of personal loans or credit card debt.
The collateral is viewed as a relatively safe investment by the lender, reducing the risk and resulting in lower interest rates. For instance, personal loans are offered anywhere in the range of 12-20%, at the same time, one can pledge the mutual fund units at 9-12%.
Ideally, pledging securities should be undertaken to address any short-term financial needs and care should be taken to repay it on time. In case of failure to repayment of the loan, it could attract penalties or lead to a total loss of investment.
Before pledging the securities, an individual should carefully examine the terms and conditions, interest rates, and potential complications and risk factors.
Also, maintain a buffer in the mutual fund investment to tide over any market volatility. In addition, plan out a repayment strategy beforehand in order to ensure timely payback of loans.x
Rajiv is an independent editorial consultant for the last decade. Prior to this, he worked as a full-time journalist associated with various prominent print media houses. In his spare time, he loves to paint on canvas.
