One can face a shortage of funds at any time. It can be in the form of medical emergencies when an individual needs substantial funds to pay hospital bills. Alternatively, one may need extra cash to fund a family event like a wedding or an expensive foreign trip. In such situations, the general tendency is to liquidate investments that people hold in mutual funds or various other securities. But instead of liquidating investments, one can consider availing of a loan against securities such as loan against shares or mutual funds.
The following sections will focus on how to avail of a loan against mutual funds and its important details.
Understanding loan against mutual funds
First, it is important to understand how a loan against mutual fund works. A loan against mutual fund is when someone pledges units of their mutual fund investments as security and avails a loan against it to fulfil their financial requirements. Various banks and Non Banking Finance Companies (NBFCs) offer loans against mutual funds up to a certain value of the NAV (Net Asset Value) of mutual funds.
A benefit of this borrowing option is that the borrower does not have to opt for premature redemption of mutual fund units. If the investor has chosen an SIP (Systematic Investment Plan) mode of investment, they can continue investing without any break.
Financial institutions sanction such loan against mutual funds depending on the NAV of the mutual fund units, the tenure, and the type of mutual fund you choose. Usually, financial institutions offer a higher LTV (Loan-to-value) ratio for debt funds than equity funds like mutual funds, due to the latter’s higher risk.
Tips to qualify for a loan against mutual funds
Detailed below are the important tips to avail a loan against mutual funds:
1. Defining the purpose of the loan is important
It is very important to have a clear understanding of why a person may apply for a loan against mutual funds in the first place. Having a definite purpose will help a potential borrower explain his/her financial requirements to the lender. It is also an important way to ensure that the person meets all the eligibility criteria.
2. It is important to choose a high-value lender
When a person looks for the best lender offering loan against mutual funds, he/she may come across multiple institutions offering attractive features, terms, and conditions. It is very important to choose a lender who provides the maximum value for one’s holdings in mutual funds.
One should consider choosing a lender that promises minimal paperwork and quick disbursal. Some of the other features that people can check include whether the lender charges interest only on the utilised loan amount or on the entire sanctioned loan amount.
One should also consider the cost of availing a loan including the processing fees and foreclosure charges.
3. It is important to check whether the mutual fund units are eligible for availing loan
Generally, financial institutions offer loans against mutual funds against pre-approved mutual fund holdings. So, when a person decides to avail of a loan against mutual funds, they should check whether their mutual fund holdings are eligible. In other words, it is important to verify the eligibility of the mutual funds that potential borrowers wishes to use as security.
4. The borrower must fulfil the eligibility criteria
People who wish to avail of a loan against mutual funds must fulfil the eligibility requirements of their respective lenders. Otherwise, they stand the risk of their loan application getting rejected. A high credit score helps a loan applicant negotiate more favourable loan terms, such as lower interest rates.
Loan against mutual funds eligibility
Detailed below is the standard loan against mutual funds eligibility criteria:
- The applicant must be an Indian resident aged between 18 to 90 years.
- One can either be a salaried or a self-employed applicant.
- The minimum portfolio value should be Rs. 50,000 for an individual to be eligible for loan against mutual funds.
- Corporates, LLP (Limited Liability Partnership), Trusts, HUFs, and Sole Proprietorships can also apply.
However, the eligibility criteria shall vary and shall be subject to change at a sole discretion of each lender.
How to avail loan against mutual funds?
People must follow these steps to apply for a loan against mutual funds with Bajaj Finance Limited:
Step 1: Visit the official online portal of Bajaj Finance Limited and click on the ‘apply’ button to open the online application form.
Step 2: Provide personal details such as name, email address, and phone number.
Step 3: Enter the total portfolio value and choose mutual funds under ‘Type of Securities’.
Step 4: Choose the city of residence. Click on submit after agreeing to the terms and conditions.
Step 5: Provide the OTP sent to the registered mobile number to complete the verification.
Financial institutions, including banks and NBFCs, may offer various pre-approved credit limits on loans against mutual funds. One needs to enter some basic information on the official web portal of a financial institution to check his/her eligibility for such pre-approved loan offers.
To sum up, important thing that people need to keep in mind for availing loan against mutual funds is to check the costs and LTV ratio of the loan. One must also research which lender is offering the best loan amount against their mutual fund holdings. Moreover, people must also check whether they can avail of any pre-approved loan offers from their existing lenders or bankers.
