Retail investors, in particular, are constantly seeking viable options to meet their financial requirements; however they often end up disrupting their investment portfolios to meet short term and emergency financial needs.
One option that has gained popularity is the concept of a loan against securities to cater for such instances. This article explores the benefits and advantages of this financing option for retail investors.
As more advanced investors, UHNIs and HNIs have historically adopted routes such as loans against securities more wisely. They have put their money to work much better than retail investors using available financing options both for personal or business needs.
Advantages of LAS
Loan against securities provides retail investors access to quick and convenient financing with a hassle-free way to access funds by leveraging their existing investment holdings. Instead of selling their securities and incurring capital gains taxes or disrupting long-term investment strategies, investors can utilize the value of their investment portfolio to secure a loan.
This allows for a seamless process without extensive documentation or lengthy approval processes associated with traditional loans.Compared to conventional personal loans or credit card debt, loans against securities typically offer lower interest rates due to securities acting as collateral of the loan.
Lenders consider the underlying securities as security against default, thereby mitigating their risk. This reduced risk translates into lower interest rates for borrowers, making it an attractive financing option for retail investors.
Moreover, loans against securities often come with flexible repayment terms, including monthly interest payments only and repayment of principal amount as and when convenient/available, enabling investors to manage their cash flows efficiently.
One of the most significant advantages of loan against securities is the ability to retain ownership of the underlying investment portfolio.
By pledging securities as collateral, investors can continue to benefit from potential capital appreciation and regular income generated by their investments via dividends and bonuses.
This ensures that investors do not miss out on the long-term growth prospects of their portfolio while meeting their immediate financial needs.
Unlike certain loans that come with predefined usage restrictions, a loan against securities allows retail investors the freedom to utilize the borrowed funds as per their requirements.
Whether it is for personal expenses, business expansion, debt consolidation, or any other legitimate financial purpose, borrowers have complete flexibility in determining the utilization of the loan proceeds.
They may even use it as an always-on credit line, keeping their securities pledged to the lender and apply for a loan against it as and when required and procure it within hours.
Taking a loan against securities can have tax benefits for investors. Instead of selling securities and triggering capital gains taxes, investors can use their securities as collateral and avoid realizing taxable gains.
By preserving their investment portfolio and deferring the tax liability, borrowers can potentially optimize their tax planning strategies.
Loan against securities allows investors to maintain their investment diversification, which is crucial for mitigating risk.
Selling a portion of the investment portfolio to raise funds may result in a loss of diversification and concentration of risk in the remaining investments. By opting for a loan against securities, investors can keep their portfolio intact and preserve the benefits of diversification and keep their asset allocation in place.
Loan against securities offers retail investors a prudent and efficient solution for accessing funds while safeguarding their investment portfolios and wealth creation objectives.
With the ability to secure quick and convenient financing, enjoy lower interest rates, retain ownership of investments, utilize funds freely, and potentially optimize tax planning, this financing option empowers investors to meet their short-term financial needs without compromising their long-term investment goals.
By ‘retailising’ LAS investors can leverage its benefits to their advantage and unlock their financial potential.
(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of Economic Times)
