Investing in mutual funds can significantly contribute to wealth accumulation over time. Interestingly, these investments can also serve as collateral for securing a loan. Lenders may consider your mutual fund holdings as a guarantee, allowing you to obtain loans at competitive interest rates. Prior to approving the loan, lenders will evaluate the value of your investments.
Numerous banks and financial institutions provide loans against mutual funds, enabling you to access necessary funds without liquidating your investments. This approach is an effective strategy for addressing immediate financial requirements while preserving your long-term investment objectives. Let us explore the concept of a loan against mutual funds and the appropriate circumstances for applying for one.
What Is a Loan Against Mutual Funds?
A loan against mutual funds (LAMF) is classified as a secured loan, where your mutual fund units serve as collateral. The lender disburses funds based on the assessed value of your mutual fund assets. Notably, you can continue to earn returns on your investments even after they have been pledged. Typically, banks and non-banking financial companies (NBFCs) offer loans against both equity and debt mutual funds. However, the specific terms and loan-to-value (LTV) ratios may differ based on the type of mutual fund involved.
Also Read: Should you withdraw or reinvest your matured investments?
How Does a Loan Against Mutual Funds Work?
A loan secured by mutual funds operates by using your mutual fund units as collateral to obtain financing from a bank or a non-banking financial company (NBFC).
According to Adhil Shetty, CEO of Bankbazaar.com, the process begins with applying for the loan from a lender that provides this option. “After you submit the necessary documentation, the lender establishes a lien (a legal claim) on your mutual fund units, which restricts you from selling or redeeming them until the loan is fully repaid. The amount of the loan granted is contingent upon the type and valuation of the mutual fund units,” he says.
Typically, lenders may offer up to 50% of the value for equity mutual funds and between 70% to 80% for debt mutual funds. Once the loan is approved, the funds are directly deposited into your bank account.
You have the option to repay the loan through equated monthly installments (EMIs) or as a single payment, based on the lender’s conditions. Throughout the duration of the loan, the mutual fund units remain under the lender’s authority. Upon repayment, the lien is lifted, and you regain complete ownership and control of your mutual fund assets.
Eligibility and Documents Required
You are required to meet the following requirements to get a loan against mutual funds:
- You should be an Indian resident.
- You must hold mutual funds in dematerialised (Demat) form.
- You should have a regular source of income to ensure repayment capacity.
- Jointly-held mutual funds can also be pledged if all holders give their consent.
You will need to submit the following documents:
- KYC documents (PAN card, Aadhaar card, passport, voter ID)
- Proof of income (salary slips, bank statements, ITR)
- Mutual fund statement from the registrar
- Loan application form
Loan Amount and LTV Ratio
The loan amount depends on the type and value of your mutual fund units:
- Equity Mutual Funds – Lenders usually offer up to 50% of the current value.
- Debt Mutual Funds – Lenders may offer up to 70% to 80% of the current value.
For example, if your equity mutual fund units are valued at Rs 20 lakh, you can get a loan of up to Rs 10 lakh. If they are debt funds, you could get up to Rs 14–16 lakh.
Interest Rates
Loan interest rates secured by mutual funds are generally more favorable than those for personal loans. These rates typically vary between 8% and 12% a year, influenced by the lender and the specific type of mutual fund involved. Debt mutual funds tend to offer lower rates compared to equity funds, reflecting their reduced risk profile.
Risks and Limitations
* Market Risk – If the value of your mutual fund units falls sharply, the lender may ask for additional collateral or partial repayment.
* Interest Burden – Failure to repay the loan on time will lead to interest accumulation and penalties.
How to Apply Online
You can apply for a loan against mutual funds online through the lender’s website or mobile app:
- Log in to your net banking or mobile app.
- Select the “Loan Against Securities” or “Loan Against Mutual Funds” option.
- Provide details of your mutual fund holdings.
- Upload necessary documents.
- Accept the terms and conditions and submit the request.
- Approval is usually granted within 24 hours. The loan amount is directly credited to your bank account.
A loan secured by mutual funds provides rapid access to capital at a reduced expense. Nevertheless, it is crucial to manage repayments diligently to prevent any financial difficulties. Additionally, ensure that you review the terms and associated risks before using your mutual fund units as collateral for a loan.