What are the advantages of availing loan against mutual funds?
While availing loan against mutual funds, one can enjoy the benefits as discussed below:
- Reasonable interest rate
One of the advantages of loan against mutual funds is their reasonable interest rates. Since it is a secured credit facility, the interest rate is lower than unsecured loan facility such as business loans or personal loans.
- Quick funding
If an individual is in urgent need of funds, he/she can take advantage of a loan against mutual funds since it provides quick financing. In the event of a financial crisis, a person can pledge mutual fund units to avail the loan This loan application process is streamlined, with minimal paperwork and eligibility parameters.
- No need to redeem mutual fund
There is no need for investors to redeem their mutual fund plan to get loans against it. Although mutual fund units are pledged as a security to avail loans, they are not sold. These enable investors to get loans and at the same time retain their ownership over their mutual funds. So, if an individual is in a financial crunch, he/she can opt for a loan against a mutual fund.
- Interest on utilised credit only
Another notable benefit of a loan against mutual funds is that borrowers must pay interest only on the utilised loan amount instead of on the total sanctioned loan amount. In other words, while issuing loans against mutual funds, lending institutions provide a portion of the pledged mutual funds value as a loan. Out of this, interest will be charged only on the utilised loan amount.
- Source of short-term capital requirements
Loan against mutual funds can be advantageous in case a person requires funds for short-term needs. Individuals may avail the loan from their investment in the mutual fund units for a short tenure and subsequently repay the same without getting stressed about losing ownership of their mutual funds.
After knowing about the benefits, look at the loan against mutual funds eligibility criteria and documents required to avail of this credit facility.
What is the eligibility criteria for a Bajaj Finance loan against mutual funds?
Anyone can apply for loan against mutual funds with Bajaj Finance Limited, as long as they meet the four basic criteria mentioned below:
- Applicant should be an Indian citizen
- Borrower must pledge the bonds with the security value of at least Rs. 50000
- Applicant should be salaried or self-employed
- Age of the applicant must be between 18 and 90 years
However, the eligibility criteria shall vary and subject to change at the sole discretion of Bajaj Finance Limited.
How can I use loan against mutual funds?
A loan against mutual funds can be a versatile financial tool, providing liquidity without liquidating your investments. Here are some common use cases:
- Emergency expenses:
- Medical emergencies: Cover unexpected medical bills, surgeries, or treatments without disturbing your investment portfolio.
- Unforeseen events: Manage urgent and unforeseen expenses such as car repairs, home repairs, or sudden travel requirements.
- Education:
- Higher education: Fund your or your children’s higher education costs, including tuition fees, books, and accommodation.
- Courses and certifications: Pay for professional courses or certifications that can enhance career prospects.
- Business needs:
- Working capital: Use the loan to meet working capital requirements, ensuring smooth business operations.
- Expansion: Finance the expansion of your business, such as opening a new branch, purchasing equipment, or hiring additional staff.
- Home renovation:
- Improvements: Finance home improvements, renovations, or repairs, increasing the value and comfort of your property.
- Wedding expenses:
- Ceremonies: Cover expenses related to wedding ceremonies, receptions, and related festivities without liquidating your long-term investments.
- Travel:
- Vacations: Fund your dream vacation or travel plans without tapping into your savings or emergency funds.
- Large Purchases:
- Consumer goods: Finance the purchase of consumer goods like electronics, appliances, or furniture.
- Vehicles: Use the loan to make a down payment on a new vehicle or to purchase a used vehicle outright.
With a loan against mutual funds, you don’t have to choose between liquidity and investment growth—you get both.
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What are the documents required to avail loan against mutual funds?
Mentioned below are the indicative documents required to avail loan against a mutual funds with Bajaj Finance:
- KYC documents: Aadhaar/ passport/ voter’s ID
- Consolidated Account Statement
- PAN card
- Loan and Security Documents as stipulated by the lender
When an individual has no physical assets but needs funds urgently, choosing a loan against mutual funds is a great option. Knowing how loans against mutual funds work should help you streamline your application process. However, before applying, borrowers should perform thorough market research, fulfil the eligibility criteria and submit the necessary documents.
How to apply for a loan against mutual funds
Applying for a loan against mutual funds is a straightforward process
- Select a lender: Choose a bank or financial institution that offers loans against mutual funds.
- Application form: Fill out the loan application form, which can often be done online or at the lender’s branch.
- Documentation: Submit required documents, such as identity proof, address proof, and the latest mutual fund statement.
- Lien marking: The lender will mark a lien on the mutual fund units, preventing their sale or redemption until the loan is repaid.
- Approval: After verifying the documents and marking the lien, the lender approves the loan.
- Disbursement: The loan amount is disbursed to your account, which can typically be used for any purpose.
Interest rates and charges of loans against mutual funds
The interest rates for loans against mutual funds are generally lower compared to unsecured loans due to the collateral provided by the mutual fund units. The rates can vary depending on the lender and the type of mutual funds pledged. Additional charges may include:
- Processing fees: A fee for processing the loan application, usually a small percentage of the loan amount.
- Lien marking fees: A nominal charge for marking the lien on the mutual fund units.
- Prepayment charges: Fees for early repayment of the loan, although some lenders may not charge this.
- Renewal fees: Applicable if the loan tenure needs to be extended.
What are the factors you should consider before investing in a loan against mutual funds (LAMF)?
Before opting for a Loan Against Mutual Funds (LAMF), consider these key factors to make an informed decision:
- Loan-to-value (LTV) ratio – Understand how much loan you can get against your mutual fund holdings.
- Interest rates – Compare interest rates to ensure cost-effective borrowing.
- Fund eligibility – Check if your mutual funds qualify for the loan.
- Repayment terms – Evaluate tenure, EMIs, and flexibility in repayment.
- Market risks – Be aware that fluctuations in NAV may impact your loan eligibility.
Conclusion
A loan against mutual funds is a practical and efficient way to access funds without liquidating your investments. It offers lower interest rates, flexible repayment options, and quick disbursement, making it an attractive option for meeting various financial needs. By leveraging your mutual fund investments, you can manage expenses while continuing to benefit from the returns on your portfolio.
