Loan against FDs, gold, or stocks? The perks and pitfalls unpacked

'This isn't free money, it's still debt,' say experts, as they break down the pros, cons, and common traps of taking loans against your investments.

If you’re looking for quick liquidity without touching your long-term investments, pledging them for a loan might be a smart move. But while loans against investments often come with lower interest rates than personal loans, they also carry some risks that borrowers should be aware of. Experts break down all the aspects that one should consider while exercising this option.

 

What can you pledge?

Several assets can be used as collateral for loans in India.

 

According to Amar Ranu, head of investment products & insights, Anand Rathi Shares and Stock Brokers, “Common assets that can be pledged include shares, fixed deposits (FDs), insurance policies, public provident fund (PPF), gold, and mutual funds.”

 

Each asset class comes with its own loan-to-value (LTV) ratio and risks.

 

For instance:

 

-Gold: Up to 75 per cent of its value can be pledged.

 

-FDs: Lenders may allow loans worth 85-95 per cent of the FD value.

 

-Shares and equity mutual funds: 50-60 per cent of the value is typical due to market volatility.

 

-Debt mutual funds: Offer higher LTVs at 70-80 per cent.

 

“PPF allows loans only up to 25 per cent of the value and that too during specific years,” Ranu adds.

 

Are these loans cheaper?

“Loans against investments are usually cheaper than unsecured personal loans because they’re backed by collateral,” says Yashoraj Tyagi, chief executive officer of CASHe. Interest rates for loans against shares and mutual funds range between 9-12 per cent, while gold-backed loans can go up to 14 per cent.

 

By contrast, personal loans often cost 12-18 per cent.

 

However, there’s a trade-off.

 

“If the market value of your pledged investments falls, you could face a margin call or even forced liquidation,” Tyagi warns.

Factors to consider before borrowing

 

Experts stress the need for caution.

 

“Before pledging, assess the real liquidity need, market conditions, and the lender’s terms,” advises Ranjit Jha, founder and chief executive officer of Rurash Financials.

 

Key points to evaluate include:

 

LTV ratio: Understand how much you can borrow.

 

Repayment terms: Short tenures mean higher EMIs.

 

Market risks: Be prepared to top up your loan if markets drop.

 

Tax implications: Unlike home loans, no tax benefit applies here.

 

Common pitfalls to avoid

 

Over-leveraging is a frequent mistake.

 

“Many borrowers pledge volatile stocks or use long-term investments for short-term expenses, disrupting financial goals,” Jha says.

 

Tyagi adds, “This isn’t free money, it’s still debt. Borrow conservatively and monitor your pledged portfolio regularly.”

 

When used wisely, loans against investments can help bridge short-term gaps without disturbing your long-term plans. But tread carefully, the risks are as real as the rewards.