Benefits of taking a loan against mutual funds
1. Liquidity without liquidation:
A loan against mutual funds allows investors to access liquidity without selling their mutual fund units. This ensures that they can retain their investment position in the market.
2. Quick and convenient:
The process of obtaining a loan against mutual funds is often quicker and more convenient than traditional loans. It involves minimal paperwork and is relatively hassle-free.
3. Lower interest rates:
Interest rates on loans against mutual funds are often lower compared to unsecured loans. This is because the mutual fund units serve as collateral, reducing the risk for the lending institution.
4. No impact on investment portfolio:
Since the mutual fund units remain pledged as collateral, the borrower continues to earn returns on the investment. There is no need to liquidate the mutual fund units, preserving the long-term growth potential.
5. No impact on credit score:
Taking a loan against mutual funds doesn't impact the borrower's credit score since it's a secured loan. The loan is backed by the value of the mutual fund units, not the borrower's credit history.
6. Multipurpose usage:
The funds obtained through a loan against mutual funds can be used for various purposes, such as meeting immediate financial needs, funding a purchase, or addressing emergencies.
Eligibility criteria for a loan against mutual funds
Eligibility criteria
- Nationality: Indian
- Age: 21 to 90 years
- Employment: Salaried, self-employed
- Portfolio value: Minimum Rs. 50,000
Documents required
- PAN card
- KYC documents: Aadhaar/ passport/ voter’s ID/ driving license/ Letter of National Population Register/ NREGA job card
- Consolidated Account Statement
Factors to consider before taking a loan against mutual funds
- Loan-to-value (LTV) ratio:
LTV ratio determines the maximum loan amount you can get against your mutual fund units. It's essential to understand the ratio and evaluate whether it meets your funding needs.
- Interest rates:
Different lenders may offer varying interest rates on loans against mutual funds. Compare rates and choose a lender offering the most favorable terms to minimise the cost of borrowing.
- Repayment terms:
Understand the repayment terms, including the duration of the loan and the frequency of payments. Evaluate whether the repayment schedule aligns with your financial capabilities.
- Penalties for non-repayment:
Be aware of any penalties or charges for non-repayment. Understanding the consequences of default is crucial to avoid unexpected financial burdens.
- Risk tolerance:
Assess your risk tolerance. While a loan against mutual funds can provide liquidity, it involves risk, especially if the market value of the mutual fund units fluctuates. To understand the maximum amount you can borrow and other conditions in detail, check the loan against mutual fund eligibility limit.
Types of mutual funds eligible for loan against mutual funds
A loan against mutual funds allows you to unlock liquidity without redeeming your investments. However, not all schemes qualify. Eligibility typically depends on fund type, volatility, and liquidity profile. Eligible mutual fund categories include:
- Equity mutual funds: Actively managed equity schemes and large-cap funds are usually accepted, though with a relatively lower loan-to-value due to market volatility.
- Debt mutual funds: Liquid funds, short-term debt funds, and corporate bond funds are widely preferred because of their stable NAVs and predictable returns.
- Hybrid mutual funds: Conservative hybrid or balanced advantage funds may be eligible, depending on the equity-debt allocation.
- ETF and index funds: Select exchange-traded and index funds can be pledged, subject to liquidity and regulatory acceptance.
The final eligibility and borrowing limit depend on the fund house, scheme performance, and prevailing market conditions.
Interest rates and charges on loan against mutual funds
Interest rates on loans against mutual funds are generally lower than unsecured loans, as the investment acts as collateral. Rates vary based on the type of fund pledged and the risk involved. Key interest and cost components include:
- Interest rate: Usually lower for debt and liquid funds, and comparatively higher for equity-oriented funds due to higher volatility.
- Interest calculation: Charged only on the amount utilised, not on the entire sanctioned limit, making it cost-efficient.
- Processing or setup charges: May apply as a one-time fee during loan initiation.
- Pledge and transaction charges: Nominal charges may be levied by depositories or fund platforms for lien marking.
Overall costs remain predictable, especially when funds are borrowed for short-term or tactical liquidity needs.
Step-by-step process to apply for a loan against mutual funds
Step 1: Click on ‘Apply Now’ at the top of this page to open our online application form.
Step 2: Enter basic details like – name, email ID, and mobile number.
Step 3: Provide your total portfolio value, and under ‘type of securities’, select mutual funds.
Step 4: Select your city of residence and agree to the terms and conditions, by clicking on ‘Submit’.
Step 5: Complete your verification, by entering the OTP sent to your phone number.
Conclusion
Taking a loan against your mutual funds can be a strategic financial move, offering liquidity without disrupting your long-term investment goals. By understanding the process, eligibility criteria, and potential benefits and drawbacks, you can make an informed decision about whether this option suits your financial needs.
Remember to carefully assess the terms and conditions, interest rates, and repayment options offered by different lenders. It is also advisable to consult with a financial advisor to discuss your specific circumstances and explore alternative financing options if necessary.
