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
Essential Guidelines for Effective Loan Management
Managing loans against mutual funds requires careful planning and awareness. Follow these tips to handle your loan responsibly and avoid financial pitfalls.
Repayment Plan
Assess your repayment plan carefully before taking a loan against mutual funds. Ensure it fits your monthly budget without straining other expenses and consider setting up auto-payments or reminders to avoid penalties.
Review Terms
Thoroughly review lender terms and conditions, including processing fees, penalties for defaults, and minimum net asset value (NAV) requirements to confirm eligibility for the loan.
Consider Market Fluctuations
Keep track of market fluctuations affecting mutual fund values. If the value dips, lenders may issue a margin call, requiring you to deposit additional funds or pay the difference.
Maintain Transparency with Lender
In case of financial difficulties or potential defaults, communicate with your lender early. They may offer flexible repayment options to help manage the situation and avoid default.
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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.
Frequently Asked Questions
Is It Good To Take A Loan Against Mutual Funds?
Yes, it can be a good option to take a loan against mutual funds. Since it allows one to opt for a loan without having to liquidate their investments.
What Is The Processing Fee For A Loan Against A Mutual Fund?
The processing fee for a loan against a mutual fund is in the range of 0.50% – 4.72% of the loan amount plus taxes.
How Much Loan Can Be Taken From A Mutual Fund?
You can get 50% of pledged equity fund units and 70%-80% of the pledged debt funds.
What Are The 4 Types Of Mutual Funds?
The 4 types of mutual funds include 1. Equity funds 2. Debt funds 3. Hybrid funds 4. Money market funds
Who Is Eligible For A Loan Against Mutual Funds?
Eligibility varies across lenders. However, common eligibility includes:
1. Indian citizen,
2. 21 & above in age,
3. Minimum security value of ₹50,000.
Are There Any Risks Associated With Loans Against Mutual Funds?
Yes, there are a few risks with a loan against a mutual fund. One of them is, that due to market fluctuations, the pledged asset value may decrease. They need to pledge additional assets in such a case.
How Quickly Can I Get Approved For A Loan Against Mutual Funds?
It varies across lenders.
Can I Continue Investing In Mutual Funds While Having A Loan Against Them?
Yes, you can continue to invest in mutual funds while having a loan against them. Even though you pledge mutual fund assets, you still have ownership over them and continue to get the returns and dividends from them.
What Happens If The Value Of My Mutual Fund Drops?
When the value of the pledged mutual fund drops, the lender issues a margin call. It means you need to repay part of the loan or pledge additional assets.
What Should I Consider Before Applying For A Loan Against Mutual Funds?
Before you consider applying for a loan against mutual funds, assess your financial situation and repayment capabilities. You also need to consider factors like interest rates, loan tenure, added charges, impact on investments and eligible mutual funds you can pledge.
