Things to Know About Loans Against Mutual Funds

Getting a loan against mutual funds is a good option if you want quick access to cash without liquidating your investments. If you have built a good portfolio of mutual funds, you can use that as collateral to take a personal loan. If you need funds for further education, a home loan, car repair or any medical emergency, you can use mutual funds as collateral to get a loan. You continue to earn returns on your pledged mutual funds.

What Are Loans Against Mutual Funds?

A loan against mutual funds is getting a short-term loan while keeping one’s mutual funds as collateral. You maintain ownership of your funds and continue to earn returns and get dividends as applicable. You only have to pay interest on the amount you borrow and tenure. Banks and NBFCs offer loans against mutual funds and have a list of mutual fund schemes that they can accept as collateral. It is important to understand that not all mutual funds are eligible for LAMF. 

How Do Loans Against Mutual Funds Work?

When a loan against a mutual fund is taken, one’s mutual funds are pledged against the loan. The mutual funds continue to grow and the individual receives the returns and dividends on the funds. 

The amount one can borrow depends on the NAV (Net Asset Value) of the mutual funds. Lender allow borrowing amounts of only 50% NAV of equity funds and 70% – 80% NAV of debt funds. Once pledged, you cannot sell the mutual funds until loan repayment is completed.

Once the loan is repaid, the lender releases the mutual funds. You may also choose to pay the loan earlier since typically there are no foreclosure charges.

Features of Taking a Loan Against Mutual Funds

LAMF offers many benefits for individuals who want to take personal loans. Below are important features of LAMF:  

Online Process: Many digital platforms offer loans against mutual funds allowing you to complete the entire process online. You don’t need to be in a queue at a bank or contact relationship managers to avail loan, you can apply and manage your loan from the comfort of your home. 

Quick Approval: One can get approved for LAMF (Loan Against Mutual Funds) within a few hours, varying from lender to lender. Many lenders also have mobile apps, where one can complete the entire process from application to disbursement, making it easier for the user. 

Low Interest Rates: LAMF typically offer lower interest rates as compared to other types of loans like home loans or education loan. This makes them a cost-effective option for borrowers. 

Portfolio Ownership: When you take LAMF, you still retain full ownership of your mutual funds. You continue earning the returns or dividends, on your investments, while your portfolio grows.

Eligibility Criteria for Loans Against Mutual Funds

Eligibility criteria vary as per the lender. You need to check the eligibility criteria of the selected lender and ensure that you fit their criteria. You have a better chance of loan approval and subsequent loan disbursal if you fulfil the eligibility criteria for loan.

Interest Rates and Charges for for Loans Against Mutual Funds

Loan against mutual fund interest rate is generally lower compared to personal loans or credit cards, making them a more affordable borrowing option. However, interest rates and additional charges, such as processing fees or penalties, can vary across lenders. It is important to carefully read the lender’s terms and conditions to understand about the exact amount and charges levied. 

Tips for Managing Loans Against Mutual Funds

Repayment Plan: Before you finalise taking a loan against a mutual fund, you need to assess the repayment plan carefully. The repayment plan should fit into your monthly budget without impacting your other expenses. If someone fails to pay penalties, take into account further fees as well. Ensure setting up auto-payments or monthly reminders to ensure timely repayments.  

Review Terms: It is essential to thoroughly review the terms and conditions of every lender that you consider. There are charges like processing fees, penalties on default or other charges that one needs to be aware of before taking a loan. Check for factors like minimum net asset value (NAV) required, that will determine whether one is eligible for the loan. 

Consider Market Fluctuations: Since you are pledging your mutual funds against the loan, you need to keep track of any market fluctuations. If, in case, the value of mutual funds dips, the lender may issue a margin call. This means that you either need to pay an additional amount to cover the difference or pledge additional funds against the loan.  

Maintain Transparency with Lender: In case of any unforeseen financial difficulties, one may default on the loan. In this case, it is best to reach out to the lender. The lender may be able to offer you a flexible repayment plan and you can effectively manage the situation, preventing a default. 

Steps to Apply for a Loan Against Mutual Funds

If you are wondering how to take loan against mutual fund, these are the basic steps you need to follow: 

Eligibility: Ensure you meet the lender’s criteria, which includes the type and value of mutual funds eligible for a loan. Lenders might also require you to be salaried or self-employed.  

Compare Lenders: Do thorough research and compare various lenders. Consider various criteria like interest rates, repayment terms, and processing fees. Ensure you are aware of the terms and conditions of each lender. 

Application: Fill out the online application form on the lender’s website or app, providing the required details about your mutual fund holdings. 

Required Documents: Upload necessary documents such as Aadhar or PAN details, proof of mutual fund ownership, and other KYC details. 

Verification: The lender will review your application and documents. They may also verify your mutual fund holdings with the asset management company (AMC). 

Loan Offer: If the loan application is approved, you’ll receive a loan offer detailing the interest rate, tenure, and repayment schedule. Review and accept the terms & conditions mentioned. 

Mutual Funds: Pledge your mutual fund units to the lender as collateral. The lender will place a lien on the units, restricting their sale until the loan is repaid. 

Loan Disbursal: Once the mutual funds are pledged, the lender will disburse the loan amount to your account, typically within a few working days. 

Repayment: Repay the loan as per the agreed terms. Once fully repaid, the lien on your mutual funds will be lifted, and you can access your investments again.

Conclusion

Mutual funds as collateral can be a good option if one wants to take a loan. Loan against mutual funds has key features like low interest rates and flexible payment plans while the borrower continues to earn returns on their pledged investments. Assessing the right type of LAMF on factors like interest rate, mutual fund pledged, and repayment terms, is important for the investor. However, take into consideration the risks involved like any tax implication or market fluctuation before taking the loan.