A loan against mutual funds (LAMF) allows you to borrow money by pledging your mutual fund units as collateral, without redeeming them. This way, your investments remain intact while you access quick liquidity for immediate needs. While it’s a convenient option, there are important factors to consider to ensure the loan works in your favour.
What is a loan against mutual funds and how does it work?
A loan against mutual funds allows investors to unlock liquidity without redeeming their investments. In this facility, you can pledge your mutual fund units as collateral to secure a loan. The lender marks a lien on the pledged units, meaning you continue to own them, but they cannot be redeemed or sold until the loan is repaid.
Once approved, the funds are disbursed quickly, often within 24 to 48 hours making it a convenient option for meeting urgent financial needs. The loan amount depends on the market value of your mutual fund holdings, generally up to a certain percentage (loan-to-value ratio). You also continue to benefit from potential capital appreciation of the pledged funds during the loan period.
This way, you gain instant liquidity while staying invested, ensuring your long-term wealth creation goals remain intact.
Key things to check before applying for loan against mutual funds
Before you apply for a loan against mutual funds, it’s important to understand the factors that determine your eligibility, borrowing limit, and repayment responsibility. Here are the key aspects to review carefully:
Eligibility criteria for loan against mutual funds
Individuals holding mutual fund units in their name are typically eligible to apply. You must be an Indian resident, aged 21 years or above, with a valid KYC and demat account. Joint holders may also apply, provided all holders give consent.
LTV ratios and loan amount limits
The loan-to-value (LTV) ratio determines how much you can borrow against your mutual fund investments. Usually, lenders offer up to 90% of the fund’s market value. The loan amount may vary depending on the fund type, portfolio value, and lender’s internal policies.
Interest rates, fees and hidden charges
Interest rates on loans against mutual funds are generally lower than unsecured personal loans. However, borrowers should also factor in additional costs like processing fees, renewal charges, and possible penalties for delayed interest payments.
Type of mutual funds eligible and excluded
Both equity and debt mutual funds are usually accepted as collateral, but lenders may exclude certain high-risk or sector-specific schemes. ELSS (Equity Linked Savings Schemes) are typically not eligible, as they have a mandatory lock-in period of three years.
Risk factors to consider before loan against mutual funds
Since mutual fund values fluctuate with market conditions, your pledged portfolio may face value erosion. If the value drops below a certain level, you may receive a margin call to either repay part of the loan or pledge more units to maintain LTV.
Tax and regulatory considerations
Loans against mutual funds do not attract capital gains tax since no redemption occurs. However, any interest paid on the loan is not tax-deductible for personal use. The lien on pledged units is registered with the mutual fund registrar as per SEBI norms.
Conclusion
In conclusion, while a loan against mutual funds can provide immediate liquidity, it is crucial to weigh the pros and cons before proceeding. Carefully assess your financial situation, the potential impact on your investments, and your repayment capabilities. Consult with a financial adviser, if necessary, to ensure you make a well-informed decision that aligns with your financial goals.
