Margin Funding vs Loan Against Securities

In the world of investing, leveraging existing assets can unlock both opportunity and risk. Two of the popular mechanisms are margin funding and loans against securities (LAS), which enable investors to raise capital without immediately selling their holdings. While both allow you to borrow against financial assets, their objectives, risk profiles, and regulations differ sharply. Margin funding primarily fuels short-term trading by letting you buy more shares with borrowed money, whereas LAS serves as a broader credit option for personal or business needs. Understanding how these work and when to use each can help you make smarter, risk-aware financial decisions. 

What is Margin Funding?

Margin funding is a mechanism where you borrow money from a broker to buy securities under a SEBI-approved Margin Trading Facility (MTF) framework. This allows you to trade with more capital than you currently have. At the same time, you will pay a part of the total cost or margin, while the broker puts up the rest. 

You will then be liable to repay the borrowed amount along with applicable interest as per broker terms with the specified margin funding interest rate. Yet, the securities that you buy along with your initial margin, serve as collateral for the broker providing the funding. The loan will be repaid once you close the position, with the remainder of the margin returned to you after deducting the losses. 

What is LAS (Loan Against Securities)?

A loan against securities in India (LAS) is a secured loan enabling you to borrow money from financial institutions/lenders by pledging your assets like bonds, stocks, mutual funds, etc., as collateral. 

You can get cash immediately for sudden needs subject to the lender’s eligibility norms under RBI guidelines for LAS, while keeping your investments intact and earning returns on the same. The loan amount is determined by the value of the securities, with interest charged only on the sum you withdraw/use, typically structured as an overdraft facility where interest is levied only on the utilised amount. 

Margin Funding vs LAS – Core Difference 

Knowing the difference between margin funding and LAS is vital to making the right choice. 

Key Aspect	Margin Funding	Loan Against Securities
Objective	Only for buying more securities/trades	Any business/personal usage
Provider	SEBI-registered stockbrokers authorised to offer Margin Trading Facility (MTF)	Financial institutions like NBFCs, brokers, and banks
Duration	Usually short-to-medium term (you may hold positions as long as you maintain the margin)	Usually, a line of credit/overdraft with a defined tenure
Rate of Interest	Mostly higher owing to higher trading risks and broker-specific exposure limits	Usually lower, since the collateral is more stable from the perspective of the lender
Liquidation Risks	Higher, subject to frequent margin calls and forced liquidation in case the stock value falls below the maintenance margin as per SEBI and exchange margin rules	Lower, margin calls are less frequent, and borrowers have more time to cover any shortfalls (generally up to 7 working days as per RBI norms for NBFCs lending against shares)

These are some aspects worth noting if you want to understand the intricate differences between margin funding and loan against shares.

Regulatory Framework in India

Here is a comparison of the regulatory frameworks for the loan against shares vs. margin funding debate.

Margin Funding: 

• Regulated by the Securities and Exchange Board of India (SEBI), and is used for buying securities for trading purposes. 
• Margin funding SEBI rules state that only SEBI-authorised stockbrokers offering Margin Trading Facilities (MTF) as per SEBI circular SEBI/MRD/SE/SU/Cir-15/04 are permitted to use their own funds or borrow from NBFCs/SCBs may provide these facilities. 
• Brokers cannot use a client's funds for another client's margin trading. 
• Margin trading is permitted only for a list of actively traded, approved, and highly liquid (Group I) securities specified by SEBI and the stock exchanges. This list is reviewed periodically by the exchanges. 
• Brokers must collect an initial margin of at least 50% and maintain a minimum maintenance margin of 40%, as per SEBI’s MTF guidelines. 
• If the margin falls below the maintenance level, the broker will issue a margin call, and the borrower must add collateral/funds. Failure to do so will lead to the pledged securities being liquidated without further notice as permitted under exchange regulations. 

LAS:

• The regulators are the Reserve Bank of India for banks and NBFCs, and SEBI for entities under its regulation. 
• Can be used for diverse needs, with eligible lenders including SCBs (not regional rural banks) and select RBI-registered NBFCs.
• A diverse range of dematerialised securities is accepted, including mutual funds, listed shares, life insurance policies, and Government securities subject to the lender’s approved list of eligible instruments. 
• The maximum permissible LTV is 50% for loans against shares as per RBI guidelines for NBFCs, while it may be higher (up to 90%) for debt mutual funds, bonds, etc. 
• Lenders should regularly review pledge securities and may issue margin calls if the value falls below the necessary LTV. Borrowers generally have up to 7 working days to restore the margin shortfall as per RBI/2021-22/88 NBFC Circular.
• Limits for physical securities are usually lower than dematerialised ones, with tenures ranging from some days to 36 months on average depending on lender policy and collateral type.

Key Benefits of Margin Funding

Some of the main advantages of margin funding include: 

• You can control a larger position with a smaller initial capital investment. Hence, you may take advantage of market opportunities that you would otherwise be unable to (due to the paucity of funds). 
• If the investment performs well, gains will be calculated on the total security value (including borrowed funds), resulting in higher returns on the actual capital. 
• You can quickly access funds to act on time-sensitive opportunities without selling existing long-term investments or waiting for settlements. 
• You can spread and diversify your portfolio across a diverse range of assets while leveraging short-selling opportunities for eligible securities only, as short-selling is subject to SEBI and exchange restrictions. 
• Interest rates may be lower than those on credit cards or personal loans, making it a relatively cost-effective way to borrow funds for investments though generally higher than secured LAS rates due to trading risk. 

Limitations of Margin Funding

Some of the limitations of margin funding include: 

• While leverage may amplify your gains, it may equally amplify the losses as well. In case you lose more than the initial investment, you may be in a soup, particularly since you’ll still have to repay the broker and remain liable for any debit balance post-liquidation.
• If the security value in the account falls below the maintenance margin, a margin call will be issued, requiring immediate deposit of additional fundsto cover the gap. 
• If you don’t meet margin calls quickly, the broker will have the right to sell all/some securities without notice, often at unfavourable prices as permitted under SEBI and exchange rules. 
• You’ll pay interest on the borrowed funds, which accrues over time. These may eat into your potential profits along with brokerage and statutory charges.

Key Benefits of LAS

Some key advantages of LAS include: 

• LAS often comes with lower interest rates than unsecured loans since the facility is backed by pledged securities, reducing lender risk. 
• You can flexibly use the funds for personal or business needs, with interest often charged daily and only on the sum you withdraw (like an overdraft). 
• You may flexibly repay the loan in instalments or even as a flexible overdraft system. 
• Liquidity is accessible with this system, without any investments being sold/disrupted. 
• You continue to gain from your investments without having to sell them or transfer ownership. 

Limitations of LAS

Some limitations of loans against securities include: 

• Margin calls are issued when the value of the pledged securities declines. You will have to repay part of the loan or deposit additional collateral to maintain the prescribed LTV ratio. 
• Failure to meet margin calls or to repay may lead the lender to sell pledged assets to recover the dues. 
• The loan amount is typically up to 50% for listed shares (as per RBI norms for NBFCs) and up to 75–90% for debt mutual funds and bonds, depending on lender policy, which may not help you meet bigger financial requirements. 
• You may only use an approved list of high-quality securities as collateral. 

When to Choose Margin Funding

If you are an experienced trader and market player, wishing to purchase more shares and amplify trading positions in the short term (while being prepared for magnified potential losses). 

When to Opt for a Loan Against Securities 

You require funds for business or personal expenditure without having to sell long-term investments. 

Risk in LAS vs Margin Funding 

Here is a round-up of the risks associated with both margin funding and loan against securities - 

Key Aspect	Margin Funding	Loan Against Securities
Main Risk	Magnified losses owing to leverage	Forced liquidation in case of non-addition or collateral/repayment (meeting margin calls)
Potential for Losses	May exceed initial capital, leading to debt owed to brokers	Maximum loss is limited to the value of the pledged securities and interest accrued till settlement
Margin Calls	Frequent and immediate risk in case of stock price falls	May occur if the LTV ratio surpasses the mandated limit, needing added collateral or partial repayment within a certain period
Market Volatility	Higher market volatility exposure	Comparatively lower market volatility exposure though pledged securities remain subject to market fluctuations

Tax Implications for LAS and Margin Funding

The funds you get from both LAS and margin funding are not taxable income. The deductibility of the interest you pay depends on the purpose for which you use the funds. If you use it for business activities, it may be claimed as a business expense, thereby reducing taxable business income.

If the loan is used for investments that generate taxable income, the interest may be deductible against that income. However, personal usage of the funds will make the interest non-deductible. 

Dividend income is taxable in the hands of the investor as per slab rate, and interest deduction is capped under Section 57 of the Income Tax Act at 20% of dividend income.

Income from securities will be taxed at 20% for short-term capital gains (selling listed equity shares held for less than 12 months) and 12.5% for long-term capital gains (selling listed equity shares held for more than 12 months).