One question we often get asked by investors is how to get financing facility in the equity markets. 

While many people borrow money from the traditional debt financing facilities provided by banks, there are two other ways to get financing for equity investments.

1. Loan against shares (LAS):

You can go to an approved bank which offers LAS facility and deposit your shares. The bank will approve an overdraft facility and the amount sanctioned will depend on how much collateral you put in.

You can withdraw funds from your LAS account whenever you want and repay it after your need is fulfilled. You will have to pay interest on the borrowed amount only for the period of borrowing.

The drawback of this facility is that generally the interest rates are much higher than the second option that we are going to discuss, i.e. buying Futures.

2. Sell equity and buy Futures of the same value:

As you might already know when you buy Futures you only have to pay a margin amount and not the full value of your position.

For example, if you buy Futures worth 5,00,000, and the margin is 30%, then you will only have to pay ₹ (5,00,000 * 30%) = ₹1,50,000 to the stock exchange and not ₹5,00,000. This is called ‘Leveraging’.

Hence, you can effectively sell all your shares and buy Futures worth Rs 5,00,000 by paying just Rs 1,50,000.

Additional considerations for leveraging:

(A) Check Tax effects

Normally, if you hold shares for more than one year then you get the benefit of long-term capital gains. However, when you hold Futures your income is treated as business income and the tax rates may be higher.

(B) Monthly Carry Forward

Since Futures have a fixed expiry, you will have to carry them forward for as long as you want to get the financing facility. Since there is a cost involved in every carry forward, your overall cost will get increased if you carry forward for too long. Keep an eye on these costs if you want to opt for this facility.

(C) Mark To Market Margin

When you buy Futures, you will have to pay mark to market margins to the exchange if the price of the underlying index of share falls. This will require you to arrange for extra funds to hold your position.

Benefits of Arranging funds through leveraging:

Selling your stocks and buying Futures is a better option than LAS in most cases, since it has the following benefits:

• It is an easy way to arrange for funds. The amount that you will free up by leveraging can be used for meeting your personal needs or in your business for earning additional returns.
• The return on investment that you will earn from this route will be much higher than holding equity shares directly.
• Arranging funds through leveraging is faster and often cheaper than traditional debt financing options or LAS.

In Index Long Term Strategy (ILTS), we purchase Index ETFs and take leverage on it through Index futures. It help us to grow our portfolio and beat Index Returns. 

Thank You.