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Friday, October 17, 2014

Loan against shares and MFs is not a good option

Loan against shares and MFs is not a good option

With the equity markets booming, you have another option to raise funds if faced with an emergency. You can take a loan against your shares or mutual funds (MFs).

According to data, State Bank of India charged 16.5 per cent for a loan against shares, while it charges 18.5 per cent for personal loans and 14.5 per cent for loans against insurance policies. Similarly, Bank of Baroda charges 13.75 per cent for loan against shares and fixed deposits and 14.75 per cent for personal loans. HDFC Bank charges 1212.5 per cent for loans against security and between 15.75 and 20 per cent for personal loans.

There have been enquiries about loans against shares. One must remember that equity markets will not go only up. So, borrowing against your investments or trading portfolio is always a tricky matter. But if it is for a business purpose, then having a collateral helps to reduce cost as compared to a personal loan, he says. According to the Reserve Bank of India' latest monthly bulletin, advances to individuals against shares and bonds grew by 24.9 per cent, as of August, over last year. As against this, the growth in personal loans was 9.2 per cent.

The growth looks large partly due to the small base. Another reason is the automatic rise in the value of the pledged securities, thanks to the booming equity markets.

When share prices go up, the line of credit extended against the scrip also increases automatically. But if share prices fall, then borrowers should be prepared for calls from their lenders asking for additional margins. Also, by RBI guidelines banks and nonbanking finance companies can extend only up to 50 per cent of the value of the share as loan. It is advisable to keep some shares as buffer in case the value of the share falls, since you can extend these as collateral. Such loans are advisable only for a short term cash flow requirement, ideally six months or so.

Borrowers will get a notice from lenders if the price of the scrip falls 15 per cent. If it falls another five per cent, the lender will issue a notice and sell the scrip if the borrower does not provide additional liquidity. One way of avoiding this is to borrow against shares of several companies and preferably blue- chip companies, instead of just one company. You can also borrow against debt instruments such as debt mutual funds and reduce the volatility in prices to some extent, he says. All banks have a pre- approved list of shares and mutual funds, which they will accept as collateral. Make sure you check the list before borrowing.  Another problem when you borrow against shares is that you cannot sell them as long as they are pledged. So, if you see prices moving sharply and want to sell, you may not be able to do it easily

For further information contact Prajna Capital on 94 8300 8300 by leaving a missed call

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