The Real Cost of Selling Is Never Just the Redemption Value
When you sell mutual funds to fund a goal, three things happen simultaneously.
- The power of Compounding stops right when it was starting to accelerate.
- Long-Term Capital Gains tax at 12.5% on gains above ₹1.25 Lakhs.
- Reinvestment Risk of entering over a long duration at higher NAVs.
Most investors calculate only the first cost.
The real number looks like this:
For a ₹1.5 Crore portfolio with ₹90 Lakhs in unrealized gains, redeeming ₹60 Lakhs triggers approximately ₹4.3 Lakhs in LTCG tax immediately and permanently. A Loan Against Securities funds the same goal at roughly similar cost, but with one critical difference: the ₹60 Lakhs stays invested. At 12% compounding, that ₹60 Lakhs becomes ₹1.86 Crores in 10 years and ₹3.14 Crores in 15. The tax is a one-time hit. The compounding loss is forever. That is the real cost most investors never calculate.
What Is a Loan Against Securities (LAS)?
A Loan Against Securities (LAS) allows you to pledge your mutual fund units or stocks as collateral and borrow against them, while your investments remain invested and continue to grow. You do not sell.
You unlock the liquidity/equity in your portfolio and deploy it towards your goals.
Lenders (Banks & NBFCs) give you a credit line based on the pledged value. You draw from that line as needed and pay interest only on the loan amount used, not the total sanctioned limit.
When the goal is funded, you repay. Your portfolio compounds the entire time.
No Sale. No Tax. No Disruption.
Here is what the structure looks like in India today:
- Up to 50% of equity mutual fund value — available as a loan
- Up to 80% of debt mutual fund value — available as a loan
- Interest: 9% to 12% per annum on drawn amount only
- Credit line activated typically within 72 hours
LAS vs Selling vs a Personal Loan: The Real Comparison.
Most people compare borrowing options by interest rate alone.
That is the wrong comparison.
Here is the complete picture.
Selling your investments: LTCG tax triggered immediately. Compounding stops permanently. Units and tax efficiency are gone. None of it is recoverable.
Taking a personal loan: Interest at 15% to 18% per annum on the full disbursed amount. Fixed EMIs regardless of your cash flow. The portfolio stays intact, but at a significantly higher cost than LAS.
Using a Loan Against Securities: Interest at 9% to 12%, only on what you draw. Portfolio stays invested and keeps compounding. No capital gains tax triggered. Repayment structured around your cash flows, bonus, rental income, and increment.
For short to medium-term needs of one to three years, LAS is almost always the most cost-efficient, tax-efficient option available.
Two Real Scenarios from My Bangalore Practice
These are real situations I have navigated with clients. Details are anonymized, and the numbers are accurate.
The Home Down Payment
A senior corporate lawyer in Bangalore had a ₹2.5 Crore portfolio built over 12 years. He needed ₹50 Lakhs for a home down payment with a reputed builder in Bangalore and was about to redeem his equity funds.
What we did instead: we pledged a portion of his portfolio, drew ₹50 Lakhs at 9.5% per annum, and structured repayment over 36 months from his monthly surplus. The portfolio stayed invested. Over the same 3 years, equity funds delivered approximately 40%, significantly outpacing the cost of borrowing.
The Overseas Education Funding
A client needed ₹75 Lakhs in three weeks for his daughter’s admission to a UK university. Liquidating would have triggered capital gains on a compounding curve built over a decade.
What we did instead: pledged the debt fund portion, drew ₹75 Lakhs at 9.8% against 80% LTV, and aligned repayment to his annual bonus cycle.
Portfolio: intact. Goal: fully funded. Tax event: none.
When LAS Works — And When It Does Not
LAS is not the right tool for every situation.
It works best when:
- The funding needed is short to medium term — one to three years.
- There is a clear repayment cash flow — bonus, rental income, increments.
- Portfolio carries significant unrealized gains that redemption would immediately formalize.
It does not work when:
- The requirement extends beyond three years.
- The portfolio is too small for meaningful pledging.
- The investor cannot absorb a margin call if markets fall sharply.
That last point matters.
If markets decline significantly, your lender can ask you to pledge more or repay part of the loan immediately.
Always maintain a 20-30% buffer above the minimum pledge requirement. Never draw to the maximum sanctioned limit.
Used correctly, LAS is one of the most efficient financial tools available. Used aggressively, it carries real risk.
Frequently Asked Questions
What is a Loan Against Securities in India?
A Loan Against Securities is a credit facility where you pledge financial assets, mutual funds, or stocks to access liquidity without selling them. The lender gives you a credit line based on the pledged value, and you pay interest only on what you draw.
Is LAS better than selling mutual funds?
In most cases, yes, especially when the combined cost of LTCG tax and long-term compounding loss exceeds the interest cost of borrowing. The break-even calculation almost always favors LAS for portfolios with significant unrealized gains.
Is a Loan Against Securities better than a personal loan?
Typically yes. LAS rates of 9% to 12% are significantly lower than personal loan rates of 15% to 18%. There are no fixed EMIs; repayment is flexible around your cash flows. And your portfolio continues compounding throughout the borrowing period.
What are the risks of a Loan Against Securities?
The primary risk is a margin call; if markets fall significantly, your lender may require additional collateral or partial repayment immediately. Managing this requires maintaining a buffer above the minimum pledge threshold and never drawing the maximum limit.
Which mutual funds are eligible for pledging under LAS?
Most large-cap, mid-cap, and flexi-cap equity funds from major AMCs are eligible. Debt funds, liquid, short-duration, and gilt are generally accepted at higher LTV ratios. ELSS funds cannot be pledged during the 3-year lock-in period. Always check the lender’s approved fund list before planning.
The Bigger Principle
A large financial goal should not automatically mean a portfolio disruption. Your portfolio took years to build.
It has weathered cycles, delivered compounding, and quietly done exactly what you asked it to do.
Before you sell, ask one question:
Can I fund this goal without breaking what I have built?
In most cases, the answer is yes.
The cost of getting this wrong is not just the tax bill. It is every rupee of compounding you permanently forfeited on the day you redeemed.
That number, calculated honestly over 10 to 15 years, is almost always the most expensive financial mistake of the year.
Most investors never calculate it. When they do, it changes the decision entirely.
Before you decide, quantify all three: the tax impact, the compounding loss, and the cost of borrowing.
Book a confidential review, and we will model it together.
