5 Reasons Why a Loan Against Securities Could Be a Better Option Than Selling Them?
When investing with a long-term view, it is important to be prepared for situations that can make it difficult to stay invested, such as market volatility and unexpected financial needs. Being patient and confident about your investment strategy can help with the first situation, the second scenario often leads investors to consider selling their investments. However, an alternative way to address short-term financial needs without redeeming long-term investments is to avail an overdraft facility through a loan against securities.
Let's list down a few advantages of borrowing against mutual funds and shares compared to redeeming investments and how it can safeguard your long-term goals while meeting short-term financial needs.
1. Current returns are negative:
There may be instances where you require funds, but your investments have experienced negative performance or the overall market conditions are unfavorable. In such cases, redeeming your investments would convert unrealized losses into realized losses. By opting for a loan against securities, you can avoid realizing these losses and instead leverage your investments to secure the needed funds.
2. The urgency of funds:
Financial needs can arise unexpectedly and with urgency, such as during emergencies or when faced with time-sensitive opportunities or payments. Redeeming investments typically takes time, often a few days or more, to receive the funds. In contrast, borrowing against shares offers the advantage of instant availability of funds, especially with the convenience of digital platforms. This makes it a viable solution when time is of the essence.
3. Potential of higher returns:
If you hold investments that show promise and have the potential to perform even better in the future, it can be challenging to make the decision to redeem them in times of urgent short-term financial needs. By opting for a loan on mutual funds and shares, you can safeguard them while accessing the required funds. This way, you can continue to benefit from the potential growth of your investments without disrupting your long-term strategy.
4. Restricted entry to investments:
Certain investment options have restrictions on fresh investments due to various reasons, such as regulatory limitations. If you already hold such investments, maintaining your position may be advantageous rather than selling them. By leveraging these investments through a loan, you can fulfil your short-term funding requirements without sacrificing the opportunity to re-enter restricted investments later.
5. Taxation and exit load:
Redeeming investments can attract capital gains tax if you have made profits on those investments. Additionally, some investments may impose exit loads or penalties upon redemption. Redeeming investments can incur these costs if you plan to reinvest after covering your short-term financial needs. By availing a loan against securities, you can avoid these costs and repay the loan when it is more convenient for you.
It's important to note that there are situations where redeeming investments may be more beneficial:
If an investment was made with a specific goal in mind, and that goal has been achieved, it is appropriate to sell the securities to fulfill the intended purpose rather than stay invested.
Investments made for short-term should be utilized when the need arises. Such investments are meant to address short-term needs, while long-term investments serve long-term goals.
Corrective action on underperforming investments:
If an investment consistently underperforms and does not clearly indicate its prospects, it may be prudent to take corrective action and redeem the investment rather than waiting indefinitely.
In conclusion, aligning your investment decisions with your goals is crucial. Borrowing against securities can be a valuable option to address short-term financial needs without disrupting your long-term investment strategy. By leveraging your investments through a loan, you can access funds instantly, retain your investment positions, and avoid incurring unnecessary costs.