Why Investment Management Companies Should Consider Loans Against Shares?

By Author: Dovetail Capital
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Are you an investment management company looking for effective ways to manage your clients' funds? Have you considered offering a loan against shares as an option?

Today, we'll explore why investment management companies need to focus on loans against shares and how they can benefit both the company and its clients.

What Is Loan Against Shares?

A loan against shares is a type of loan where the borrower pledges their securities, such as stocks, mutual funds, or exchange-traded funds, as collateral for a loan. The lender, usually a bank or financial institution, offers the borrower a loan amount based on the value of the pledged securities. The borrower can then use the loan amount for any purpose, such as financing their business, buying a property, or funding their children's education.

Why Investment Management Companies Should Focus On Loans Against Shares?

•Diversification of Portfolio: By offering loans against shares as an option, investment management companies can diversify their portfolio and offer a wider range of services to their clients. This can help them acquire new consumers ...
... while also retaining existing ones.

•Higher Returns: Getting a loan against shares approved can provide higher returns compared to other investment options. For example, if a borrower pledges securities worth Rs. 10 lakhs as collateral, they can get a loan amount of Rs. 8 lakhs at an interest rate of 10%. If the borrower invests this loan amount in a fixed deposit, they can earn an interest rate of 6% to 7%. However, if the borrower invests the loan amount in a mutual fund, they can earn an average return of 12% to 15% per annum. This way, both the borrower and the investment management company can benefit from higher returns.

•Low Risk: A loan against shares is a secured loan, which means that the borrower has pledged their securities as collateral. This reduces the risk for the lender and the investment management company, as they can sell the securities to recover the loan amount in case of default. This makes loans against shares a low-risk option for investment management companies.

•Flexibility: Loan against shares offers flexibility to both the borrower and the lender. The borrower can use the loan amount for any purpose, and the lender can offer a loan amount based on the value of the pledged securities. This makes it easier for borrowers to access funds without selling their securities, and for lenders to provide loans based on the value of the securities.

•Quick Disbursement: Loan against shares offers quick disbursement of funds compared to other loan options. Since the securities are already pledged as collateral, the lender can disburse the loan amount quickly after verifying the value of the securities. This makes it easier for investment management companies to manage their clients' funds efficiently.

How Can Investment Management Companies Offer Loan Against Shares?

Investment management companies can offer loan against shares by partnering with banks or financial institutions that provide this service. They can also set up their own subsidiary or partner with a non-banking financial company (NBFC) to offer loans against shares to their clients.

To offer loans against shares, investment management companies should have a clear understanding of the securities market and the risks involved. They should also have a robust risk management system in place to minimize the risk of default and ensure timely recovery of the loan amount.

On the last note, a loan against shares is an effective option for investment management companies looking to diversify their portfolio and offer higher returns to their clients. It is a low-risk option that offers flexibility and quick disbursement of funds. Investment management companies can offer loans against shares by partnering with banks or financial institutions or setting up their own subsidiary. By offering loans against shares, investment management companies can attract more clients and retain existing ones while managing their clients' funds efficiently.