Are loans against stocks and mutual funds good for investors?

Capital markets are one of the most preferred investment mechanisms in India currently due to their long-term wealth creation factor and higher interest rates than compared to traditional schemes. They also provide incentives such as dividends, bonus issues, and stock splits among others. They are cheap with promising returns on both short and long-term basis. Sure, they are sentiment-driven but in the longer term, the capital market has been seen as a successful example of achieving high values on your investment.

According to Finsire data, Indian households invest 49.4% in property, 15.1% in bank deposits, 15% in gold, 6.2% in insurance funds, 5.7% in mutual funds, and 4.8% in equities.

With stocks, mutual funds, bonds, and insurance adapting to more advanced technology, investors can use them as additional collateral for other purchases. Some financial institutions currently offer loans against stocks and mutual funds facilities to investors.

Shreyans Nahar, CEO & Co-founder, Finsire said, “India is an asset-rich but liquidity-poor country. Liquidity comes from unlocking assets in exchange for a specific market value for the asset. Here is where secured credit comes into existence. Secured credit systematically builds the economy.

Explaining in detail, Nahar said, historically, Indians prefer secured credit with home, agriculture land, gold, and vehicle loans. Nearly by total value, secured loans have always been over 70-75% in the Indian lending ecosystem.

As digitization progresses in the ecosystem ease, Nahar believes that consumers expect to leverage digital assets at ease in every digital touch point to take credit.

Data from Finsire revealed that in today’s time, Indians have a total of assets across properties of 10.7 trillion dollars. Still, the digitizable assets are 3 trillion dollars held by the brokers and the asset originators.

Over time, he believes as stocks, mutual funds, bonds, and insurance become more digitized for APIs to be prevalent and viable in the ecosystem, users will get more avenues to pledge, take credit on them, and sometimes use them as additional collateral for other purchases.

There are plenty of benefits for both lenders and asset holders for loans against stocks and Mutual funds as per Finsire CEO. These are:

Investors and users:

Convenience: Technology has changed the lives of individuals, starting from convenience. Pledging and de-pledging at various touchpoints for these digital assets make it easier to take credit than applying for a loan from a bank or a personal loan with various documentation proofs.

De-centralization of pledging: Previously, users for secured credit had to seek lenders; now, they can either do it at their respective brokers and over and beyond; as APIs increase the scalability, they can avail the credit at various digital platforms they use daily.

Loan terms: Secured loans usually have better terms, Interest rates go below 10.5%, LTV increases as more assets that are digitized get pledged, and loan durations are upon the asset longevity or maturity and convenient repayments.

Leverage: Most long-term holdings as stocks and mutual funds, sit in the brokers’ database and serve the one-dimensional purpose of giving a return to investors. Today, users can continue holding the asset and easily leverage that for credit.

Lenders:

Transparency: As assets are digitized, it’s no more pledging a hard asset like gold, land, or a vehicle that can be fudged in the system with counterfeits. Most of the digital assets are transparent with their respective data.

Reduced risk by combining assets on the capital stack: Adding multiple assets on the same capital stack provides more collateral to the lenders and decreases volatility compared to a single asset.

Nahar added, “the push from mutual funds and stocks will soon force other hard and non-digitizable assets today to be digitized by various asset originators.”

Lastly, he said, “over the next few years, India will be unlocking its total asset potential by digitizing assets at scale.”

Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before taking any investment decisions.