During times of financial need — whether due to unexpected medical emergencies or planned expenditures like home renovations — many individuals either turn to personal loans or credit cards or dip into their investments.
While these methods may provide immediate relief, the long-term perils to your personal finances cannot be overlooked.
Personal loans, for instance, can carry interest rates as high as 25% per annum, depending on the lender and your credit profile.
Meanwhile, excessively relying on credit cards and not paying the total amount due on time can lead to steep annual interest of around 35%-45%.
Missing payments or late payments further attract penalties, not only adding to your debt burden but also negatively impacting your credit score, making future borrowing more difficult and expensive.
Even if you plan to repay the loan early, prepayment charges levied by lenders could erode any interest savings, reducing the overall benefit of early closure.
Liquidating investments might seem like a straightforward solution to avoid high-interest debt. However, doing so becomes a hurdle in your progress towards long-term financial goals.
Moreover, the redemptions can attract taxes and exit loads, eating into your returns.
In such a scenario, a Loan Against Mutual Funds may be a worthwhile alternative to high-interest debts and liquidating investments prematurely.
What Is a Loan Against Mutual Funds?
A Loan Against Mutual Funds is a type of Loan Against Securities that allows you to pledge your mutual fund units to a bank/NBFC as collateral to borrow funds, without needing to sell or liquidate them.
The loan amount you will be eligible to receive will depend on the value of units held in your folio.
Note that while availing loan against the securities, the bank/NBFC marks a lien on the units to the extent of the loan — which means that you cannot sell or redeem the pledged units until the loan is repaid in full.
Opting for a Loan Against Mutual Funds instead of redeeming/liquidating an investment carries the following benefits:
- It does not get in the way of compounding when planning for long-term financial goals.
- Your ongoing SIPs (Systematic Investment Plans) are not interrupted in the process, ensuring continued wealth creation.
- The interest rate charged on this type of loan is significantly lower than that of an unsecured personal loan.
- There is no system of fixed EMIs, as is the case with regular loans. You can pay at your convenience during the loan tenure.
- Prepayments do not incur any additional charges, unlike other types of loans.
- There are no restrictions on how you use the borrowed funds, provided you are using the money for legitimate purposes.
Moreover, the application process for Loan Against Mutual Funds is fairly simple compared to other loans.
Who Offers Loans Against Mutual Funds?
Several banks and NBFCs offer Loans Against Mutual Funds, both offline and online. Digitally well-equipped banks, such as SBI, ICICI Bank and HDFC Bank to name a few, offer these loans online without any paperwork. Loans Against Mutual Funds are sort of pre-approved for a set of pre-qualified customers.
That being said, note that not all banks and NBFCs accept mutual funds managed by all the Asset Management Companies (AMCs).
Some leading banks only accept the fund houses registered with Computer Age Management Solutions Private Limited (CAMS) – India’s largest mutual fund transfer agency.
For instance, if you hold mutual fund investments registered with CAMS and maintain a savings account with ICICI Bank, you may be eligible as a pre-qualified borrower for a Loan Against Mutual Funds. ICICI Bank has a detailed list of approved mutual fund schemes across mutual fund houses.
The minimum Loan Against Mutual Funds you can avail of from ICICI Bank is Rs 50,000, while the maximum varies — up to Rs 20 lakh for equity mutual funds and up to Rs 1 crore for debt mutual funds.
The loan amount you get will depend on the value of the mutual funds pledged as collateral. Generally, the Loan-To-Value (LTV) ratio is in the range of 50%-70% of the value for equity funds and up to 80%-90% for debt mutual funds.
If you have mutual fund schemes that do not appear on the list of approved schemes of leading banks, new-age digital lenders such as Dhanlap (powered by Ark Neo Finance) and NBFCs such as Tata Capital and Bajaj Finserv can help you.
With the Reserve Bank of India (RBI) expected to cut rates in the near future and sufficient liquidity in the system, banks and NBFCs would be offering Loan Against Mutual Funds at competitive interest (currently around 10%-12% p.a.)
When Should You Apply for a Loan Against Mutual Funds
You should consider taking a loan against your mutual fund investments only when you are in dire need of funds but want to avoid liquidating your investments and/or discontinuing your SIPs assigned for other envisioned financial goals.
Borrowing against your mutual funds, thinking of taking advantage of the current equity market volatility, could be a fatal mistake.
You see, equity mutual funds have lost 21% so far in the current calendar year 2025. Only some worthy mutual fund schemes have managed to create wealth for investors. In such a scenario, you may not be able to avail of a substantial loan amount.
If the market and the asset prices unexpectedly drop further, you may be subject to a margin call (asked to pay margin money) or asked to furnish more securities as collateral. You would also have to bear the high interest cost involved.
Likewise, caution needs to be exercised when offering debt funds as collateral. If the debt mutual fund schemes you hold have poor portfolio characteristics, i.e. holding poor-quality debt papers, it may add to the risk and in turn, you may be required to provide additional collateral or pay a margin if the value of the pledged debt funds reduces in value.
On the flip side, if the markets move up again, there will be no question of facing a margin call against the loan availed or being required to provide additional collateral, as your mutual fund investments are likely to have fared better with the increase in underlying asset prices.
How to Apply for a Loan Against Mutual Funds?
While the exact process may vary slightly across banks/NBFCs, it is generally straightforward and involves the following steps online:
- Visit the official website of the bank or NBFC you wish to borrow from and sign up or log into your net banking account.
- Share the required personal details (name, address, age, contact numbers etc.).
- Submit your documents (a Consolidated Account Statement of your mutual fund portfolio).
- Choose the investments you wish to mark a lien on.
- Carefully review the terms and conditions, accept them, and receive the money digitally.
How to Close a Loan Against Mutual Fund?
Timely repayment will help you close the loan and is in the interest of your financial well-being. Many lenders permit part-payment of loans, wherein they free up some units depending on the amount you’ve partly paid.
Upon full repayment of the loan, the fund house will remove the lien on your mutual fund units on request from the lender, after which you can have full access to your investments.
But in case you are unable to repay the loan, the lender will request the fund house to redeem the pledged mutual fund units and recover the outstanding dues from the redemption proceeds.
To Conclude…
A Loan Against Mutual Funds can be a feasible option in a financial crunch, rather than liquidating your mutual fund portfolio.
That said, you need to carefully assess the market conditions, the purpose for which you need the money and how you plan to repay, before availing of this loan.
Be thoughtful in your approach.
This article first appeared on PersonalFN here.
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