Market crashes can be stressful. Watching your portfolio value drop by 20%, 30%, or more can create panic — especially if you have an urgent financial need at the same time.

The natural instinct during a crash is to sell your investments and move to cash. But selling during a downturn locks in your losses permanently. A loan against securities offers an alternative: you can borrow money using your investments as collateral, without having to sell them.

What Happens When You Sell During a Crash?

Let us look at a simple example.

Suppose you invested ₹10,00,000 in an equity mutual fund. During a market correction, the value drops to ₹7,00,000. You need ₹5,00,000 urgently for a medical expense.

If you redeem:

• You sell units worth ₹5,00,000 at the current depressed NAV
• You permanently lose those units
• When the market recovers (as it historically always has), you no longer have those units to benefit from the recovery
• You also trigger capital gains tax on the redemption

If you take a loan against your holdings instead:

• You borrow ₹5,00,000 using your mutual fund units as collateral
• Your units remain invested and continue to participate in the recovery
• Once the market recovers and your need is met, you repay the loan
• You keep all your units and their growth

This is the core idea: stay invested through the downturn and borrow against your portfolio instead of liquidating it.

How Does Loan Against Securities Work?

A loan against securities (LAS) is a secured loan where your financial assets serve as collateral. The lender places a lien (a temporary hold) on your securities. You continue to own the assets and benefit from any price appreciation, dividends, or interest — but you cannot sell or transfer them until the lien is removed.

The key terms to understand:

• LTV (Loan-to-Value) Ratio — The percentage of your portfolio value that you can borrow. For mutual funds, this typically ranges from 50% to 80% depending on the fund type.
• Interest Rate — Since the loan is secured, interest rates are significantly lower than personal loans or credit cards.
• Tenure — Most LAS facilities are available as overdraft facilities, meaning you can draw and repay flexibly.
• Lien Marking — Your units are marked with a lien in favour of the lender, which is removed once you repay.

Why It Matters Most During a Crash

During normal market conditions, the choice between selling and borrowing is less dramatic. But during a crash, the math changes significantly:

Recovery Potential

Markets have historically recovered from every crash. The 2008 global financial crisis, the 2020 COVID crash, and multiple corrections in between — each time, patient investors who stayed invested recovered their losses and went on to make gains.

If you sell at the bottom, you miss this recovery entirely. A loan lets you bridge the gap until recovery happens.

The Cost Comparison

Consider this scenario during a 30% market correction:

In most cases, the interest cost of borrowing is far less than the opportunity cost of selling at a low point.

Tax Efficiency

Selling mutual funds triggers capital gains tax:

• Short-term capital gains (STCG): 20% on equity funds if held less than 1 year
• Long-term capital gains (LTCG): 12.5% on equity funds above ₹1.25 lakh per year

A loan against securities does not trigger any capital gains tax because you are not selling anything. This can save you a meaningful amount, especially on large portfolios.

Which Securities Can You Use as Collateral?

Most types of financial securities can be pledged:

• Equity mutual funds — Both direct and regular plans
• Debt mutual funds — Including liquid and overnight funds
• Shares and stocks — Listed shares held in demat form
• ETFs — Exchange-traded funds
• Bonds and government securities
• Insurance policies — In some cases

The LTV ratio varies by asset type. Debt funds and government securities get higher LTV (up to 80%) because they are less volatile. Equity funds and shares get lower LTV (50-65%) to account for price fluctuations.

Things to Keep in Mind

While loan against securities is useful, there are a few things to be aware of:

Margin Calls

If the market falls further after you take the loan, the value of your collateral drops. If it falls below a certain threshold, the lender may ask you to either:

• Pledge additional securities, or
• Repay part of the loan

This is called a margin call. It is important to not borrow the maximum available amount — keep a buffer so that a further market decline does not immediately trigger a margin call.

Interest Costs

While interest rates on LAS are lower than unsecured loans, they are still a cost. If you borrow for an extended period, the interest adds up. Use this facility for short to medium-term needs, not as a permanent borrowing strategy.

Lien on Your Units

While the lien is active, you cannot sell, switch, or redeem the pledged units. Make sure you are comfortable locking those specific units for the loan duration.

When Does LAS Make the Most Sense?

• Market is significantly down and you need liquidity urgently
• Short-term cash need — medical emergency, business requirement, or a time-sensitive opportunity
• You have a strong conviction that markets will recover (which they historically do)
• You want to avoid capital gains tax on a large redemption
• You have adequate collateral and can manage potential margin calls

Key Takeaways

• Selling investments during a market crash locks in losses permanently
• A loan against securities lets you access cash without selling your holdings
• Your investments continue to participate in the market recovery
• Interest costs are usually much lower than the opportunity cost of selling at the bottom
• LAS does not trigger capital gains tax
• Always maintain a buffer and be prepared for margin calls if markets fall further

The next time a market crash makes you anxious, remember: you have options beyond selling. A loan against your securities can help you weather the storm while keeping your long-term wealth-building plan intact.