A loan against shares (LAS) and a loan against mutual funds (LAMF) are two financial products that allow individuals to borrow money using their investment holdings as collateral. These loans provide a way for investors to access funds without liquidating their investments. Here's a brief overview of both:
Loan Against Shares (LAS):
Collateral: LAS is a type of loan where you pledge your existing shares, typically equity shares, as collateral to secure the loan. The lender evaluates the quality and quantity of the shares to determine the loan amount you can receive.
Lender: LAS is offered by banks, financial institutions, and some brokerage firms. These lenders provide loans against shares to eligible borrowers based on their creditworthiness and the value of the shares.
Loan Amount: The loan amount you can receive through LAS depends on the value of the shares you pledge as collateral. Lenders usually provide a loan-to-value (LTV) ratio, which is a percentage of the current market value of the shares. The LTV ratio varies but is typically around 50% to 70%.
Interest Rate: LAS loans come with an interest rate that may be fixed or variable, depending on the lender's terms. The interest rate is typically lower than unsecured personal loans because the loan is secured by collateral.
Tenure: LAS loans usually have a fixed tenure, and borrowers make periodic interest payments during the loan term. The principal amount is typically repaid at the end of the loan tenure.
Use of Funds: Borrowers can use the funds obtained through LAS for various purposes, including personal expenses, business needs, or investments in other asset classes.
Risk: While LAS can provide access to funds, there is a risk of losing your pledged shares if you cannot repay the loan, including interest, within the agreed-upon terms. If the value of the shares declines significantly, you may be required to pledge additional collateral or repay a portion of the loan.
Loan Against Mutual Funds (LAMF):
Collateral: LAMF is a loan product where you pledge your mutual fund units as collateral to secure the loan. This allows you to keep your mutual fund investments intact while accessing funds.
Lender: LAMF is offered by select banks and financial institutions. These lenders evaluate the mutual fund units' value and quality before providing the loan.
Loan Amount: Similar to LAS, the loan amount for LAMF depends on the value of the mutual fund units pledged as collateral. Lenders typically offer an LTV ratio, which may be around 50% to 70% of the mutual fund's net asset value (NAV).
Interest Rate: LAMF loans come with an interest rate, which can be fixed or variable. The interest rate is typically competitive compared to unsecured personal loans due to the collateral.
Tenure: LAMF loans have a fixed tenure, and borrowers make periodic interest payments during the loan term. The principal amount is usually repaid at the end of the loan tenure.
Use of Funds: Borrowers can use the funds obtained through LAMF for various purposes, similar to LAS, including personal expenses, business needs, or other investments.
Risk: As with LAS, there is a risk of losing your pledged mutual fund units if you cannot repay the loan within the agreed-upon terms. If the value of the mutual fund units declines significantly, additional collateral or partial repayment may be required.
Both LAS and LAMF can be useful for individuals who require funds without selling their investment holdings. However, borrowers should carefully consider the terms, interest rates, and risks associated with these loans and ensure they have a repayment plan in place to avoid the potential loss of collateral. It's advisable to consult with financial advisors or lenders to understand the specific terms and conditions of these loans.