When faced with unexpected fund requirements, taking a loan against your mutual funds can be a smart and convenient option. A loan against mutual funds allows you to borrow money using your mutual fund investments as collateral. This can be a convenient way to access funds without selling your investments, helping you maintain your long-term investment goals. It allows you to access funds without selling your investments and potentially missing their long-term growth. However, before proceeding, it is essential to understand the process and factors involved in securing a loan against mutual funds.
Step-by-step guide to taking a Loan Against Mutual Fund holdings
1. Choose the right lender
The first step is to identify potential lenders who offer loans against mutual funds. Banks, financial institutions, and asset management companies are common sources for such loans.
2. Check loan eligibility:
Each lender will have specific eligibility criteria for borrowers. Additionally, the mutual funds must be eligible for loan purposes according to the lender's guidelines.
3. Assess loan-to-value (LTV) ratio:
The loan amount that you can get against your mutual funds depends on the LTV ratio set by the lender. With Bajaj Finance Limited, you can get a loan of up to 90% of mutual fund value.
4. Complete loan application:
Once you have selected a lender and assessed your eligibility, fill out the loan application form with accurate details.
5. Pledge your mutual funds:
After the lender processes your application and approves the loan, you will need to pledge your mutual fund units as collateral.
6. Receive Loan disbursement:
Once the pledge is complete, the lender will disburse the loan amount directly to your bank account.
Eligibility criteria and required documents
Eligibility criteria
- Nationality: Indian
- Age: 18 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
Benefits of taking a loan against mutual funds
- 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. - 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. - 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. - 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. - 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. - 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.
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.
Step-by-step guide to apply for a loan against mutual funds online
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.
