5 Things to Know About Loans Against Mutual Fund Investments

A loan against mutual funds is a form of secured lending that allows you to access shortterm liquidity without redeeming your mutual fund investments It is becoming an increasingly popular choice for investors who want to meet urgent financial requirements while keeping their longterm investment goals intact Here are five important aspects you should know before considering a loan against mutual funds1 Understanding how a loan against mutual funds worksA loan against mutual funds operates much like a loan against shares or fixed deposits When you apply for this facility your mutual fund units are pledged as collateral in favour of the lender In return the financial institution disburses a loan amount usually as a fixed percentage of the Net Asset Value NAV of the pledged unitsThis arrangement allows you to raise funds without liquidating your investment Your portfolio continues to earn returns while being used as a security for the loan However you lose access to redeem or switch the pledged units until the loan is repaid in full2 The types of mutual fund units accepted as collateralNot all mutual funds are eligible for pledging Lenders typically acceptEquity mutual funds ndash Though more volatile they are commonly pledged due to their popularityDebt mutual funds ndash These are considered relatively stable and are preferred by some lendersHybrid mutual funds ndash Only specific types of hybrid funds are eligible depending on their asset allocationThe final list of acceptable funds may vary across lending institutions Generally schemes from AMCs registered with SEBI and listed on recognised depositories like NSDL or CDSL are acceptedAdditionally the fund must be held in demat form Mutual fund units in physical format or those not registered with the appropriate depository are not eligible for this facility3 Loan against mutual funds interest rate and chargesThe loan against mutual funds interest rate varies by lender and the type of funds pledged Typically the interest rates fall within the range of 937 to 12537 per annum Loans secured against debt mutual funds may attract lower rates than those against equity mutual funds due to lower market volatilitySome key cost components to be aware of includeInterest rate Charged either on a monthly reducing balance or daily usage depending on the lenderrsquos termsProcessing fees Usually around 2537 to 137 of the sanctioned amount with a minimum thresholdPledge charges Custodians and depositories like NSDLCDSL may levy a fee for pledging and unpledging unitsPenal charges Late EMI payments or failure to maintain margin requirements can invite penalty interestSince the loan against mutual funds interest rate directly impacts your total borrowing cost it is advisable to compare multiple lenders and evaluate their terms before availing of the facility4 Loan limits tenure and margin requirementsThe sanctioned loan amount is determined based on the value of the pledged mutual fund units and the lenders loantovalue LTV ratio policy GenerallyLTV ratio Can range from 5037 to 7037 of the current NAVMinimum loan amount Often starts from 25000 or 50000Maximum loan amount Can go up to 5 crore or more for highnetworth individualsLoan tenure Ranges from one month to three years depending on the lenderLenders may also impose a margin maintenance requirement If the NAV of the pledged mutual funds falls sharply the borrower may need to top up the collateral or repay a part of the loan to maintain the margin Failure to do so may result in the lender invoking the pledged units to recover the dues5 Key benefits and considerations before applyingA loan against mutual funds offers multiple advantages particularly for investors with a longterm horizon However it is important to weigh the pros and cons carefullyBenefitsNo need to redeem investments Your portfolio continues to grow as per market conditions while serving as collateralQuick disbursal Once your mutual fund units are pledged loans are often sanctioned and credited within 24ndash48 hoursLower interest cost Compared to personal loans or credit card borrowing a loan against mutual funds generally has a lower interest burdenFlexible usage The loan can be used for any personal or professional financial need without enduse restrictionsOverdraft option Some lenders offer an overdraft facility against mutual funds enabling you to pay interest only on the utilised amountConsiderationsMarket risk NAV fluctuations can impact the loan value and may lead to margin callsEligibility limitations Not all mutual funds are accepted and units must be held in dematerialised formatLoss of liquidity Pledged units cannot be switched redeemed or used for other purposesPledge revocation If repayment obligations are not met the lender can sell your mutual fund units to recover duesWho should consider a loan against mutual fundsA loan against mutual funds is suitable forSalaried professionals and business owners needing temporary cash flow supportInvestors seeking emergency liquidity without exiting the marketIndividuals with longterm investment goals who do not want to disturb compoundingBorrowers who want to avoid higherinterest personal loans or credit card debtHowever it may not be ideal for those with highly volatile equity portfolios or individuals with irregular repayment capacity In such cases the risk of forced liquidation or margin calls increasesHow to apply for a loan against mutual fundsApplying for a loan against mutual funds is relatively simple Here is a stepbystep guideCheck eligibility Confirm if your mutual fund units are accepted and are held in demat formChoose a lender Compare interest rates tenure LTV ratio and processing fees across banks and NBFCsOnline or offline application Fill out the application form and provide KYC documentsPledge units Authorise the pledge of units via NSDLCDSL using your demat credentialsLoan disbursal Once the pledge is approved the loan amount is credited to your bank accountSome banks and brokers offer fully digital journeys for LAS Loan Against Securities including esignature and digital pledge confirmationConclusionA loan against mutual funds is a flexible and efficient financing option for investors who require shortterm liquidity without disturbing their longterm wealth creation journey By pledging existing investments instead of redeeming them you can meet urgent financial needs while allowing your funds to continue earning returnsHowever it is crucial to evaluate the loan against mutual funds interest rate margin requirements and risks related to market volatility before proceeding This facility is most effective when used with financial discipline and a clear repayment plan For investors with stable mutual fund portfolios and a need for immediate funds this form of secured borrowing can serve as a practical and costeffective alternative to traditional personal loans

5 Things to Know About Loans Against Mutual Fund Investments

1. Understanding how a loan against mutual funds works

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5 Things to Know About Loans Against Mutual Fund Investments

1. Understanding how a loan against mutual funds works

Other Articles

Mid-Day Fast