Many people invest in mutual funds to grow their wealth, but it offers another significant benefit. One can use his/her mutual fund investments to avail of a loan during financial needs. Financial institutions such as banks and NBFCs (Non-Banking Financial Companies) offer loans against mutual funds to help people meet their personal and professional financial requirements.
In simple words, when people pledge units of mutual funds as collateral to avail of a loan from their preferred lender, it is referred to as a loan against mutual funds.
Benefits of loan against mutual funds
There are multiple benefits of availing a loan against mutual funds:
- Firstly, investors can get quick access to funds without liquidating their investments. This means that their investments in mutual funds can continue earning returns even when used as collateral
- This borrowing option comes with lower interest rates when compared with other options such as personal loans or loan against credit card. This is primarily because a loan against mutual funds is a secured loan.
- It is an effective borrowing option for short-term financial needs. This is because it helps people raise the required amount without redeeming their mutual fund investments.
- Another important benefit of a loan against mutual funds is the borrower has to pay interest only for the amount of the loan that is utilised by him/her.
- It helps borrowers raise money quickly. Suppose a person needs to pay his medical bills or the fees for his children’s higher education, they can avail loan against mutual funds by pledging their mutual fund units in favour of a lender.
Why is taking a loan against mutual funds better than exiting investments?
When considering borrowing options, it’s essential to evaluate whether a loan against mutual funds is the most suitable choice for your needs. While financial planning is typically done in advance, unexpected expenses can arise, such as funding large purchases, vacations, or family events. In such cases, people often think of liquidating assets or applying for personal loans, credit cards, or BNPL (Buy Now Pay Later) options.
However, for those with mutual fund investments, a loan against mutual funds could be a more convenient alternative. This option allows you to borrow funds using your investments as collateral without selling them, thus preserving potential future gains. Moreover, the interest rate on loans against mutual funds is typically lower than that of personal loans.
In short, loans against mutual funds provide quick access to cash while allowing your investments to continue growing, making it a more advantageous option compared to other borrowing tools.
How to avail a loan against mutual funds with Bajaj Finance?
Here is how you can apply to avail a loan against mutual fund:
- Go to our Loan Against Mutual Funds page.
- Enter your personal information, such as your name, PAN number, date of birth, and so on.
- Provide your email address and confirm it.
- We'll use your mobile number to retrieve your portfolio details from the CAMS and KFintech systems.
- Select the funds from your portfolio and specify the number of units for each to create a loan offer.
- We'll generate a loan offer based on your eligibility. You can proceed with the offer or modify it.
- Confirm your choice by entering the OTP.
- Complete the KYC and bank account verification process to generate the sanction letter.
- Accept the agreement and give your consent for loan approval and disbursement.
- After verification, the loan amount will be credited to your bank account.
Important factors to help people decide
People must check the following factors as it will help them decide whether they need a loan against mutual funds:
- It is important to keep in mind that not all financial institutions provide loans against mutual funds. So, it would be a good idea for potential borrowers to check which lender offers this loan facility and their reputation.
- They must assess whether banks or financial institutions have a specified list of securities/ mutual funds against which loan is provided.
- Potential borrowers must remember that the total loan amount they can get against their mutual fund holdings depends on two factors: the type of mutual fund scheme they have invested in and the bank/Non-Banking Finance Companies (NBFCs) from which they wish to avail of the loan against mutual funds are the determining factors.
- Generally, the total loan amount approved is higher for debt investments and much lower for equity investments. The main reason is equity funds are riskier investments as they are subject to market volatility.
- Generally, financial institutions stipulate a lower limit and upper limit on the loan amount that people can apply for. Considering that it varies from lender to lender, it is advisable to analyse the loan amount one will need and apply accordingly.
- Borrowers can continue to earn returns on the mutual fund units that they have pledged. But, if they default on their loan repayments, the financial institution can redeem the mutual fund units to recover the money.
- When a person is assessing his/her need for a loan against mutual funds, they should remember that the overall cost of a loan against mutual funds is less than personal loans and loan against credit card.
Various banks and NBFCs provide pre-approved credit limits on financial products such as loan against mutual funds for their valued customers. These offers expedite the loan application process. To check their pre-approved offers, people need to visit their lender’s official website and log in with their credentials.
With the increasing digitisation of shares and mutual funds, investors are increasingly making use of newer avenues to seek credit. Utilising these investment options as additional collateral has made it easier for people to fulfil their financial requirements.
When faced with financial needs, people can easily avail of a loan against mutual funds. But it would help if one remembered the useful tips mentioned above before applying. While the total cost of this borrowing option is much less than others, it will depend on their mutual fund scheme and the lender.
