Loan Against Mutual Funds 2023 {How to Apply}

Loan Against Mutual Funds: In times of emergencies, many of us face financial constraints and often resort to depleting our savings, selling off investments, or taking out loans. However, instead of liquidating your investments, there’s an alternative – obtaining a loan against them. Although uncommon, several financial institutions extend loans against assets like mutual funds, shares, and securities.

Opting for a loan against your mutual funds is generally more advisable than selling them outright. Read on to discover how this type of loan functions, the associated interest rates, and its benefits.

Why would an investor choose a loan against mutual funds?

Most of us encounter situations when unforeseen expenses, like medical emergencies or urgent house repairs, demand immediate financial attention. In such instances, the first thought is often to liquidate investments. However, if your investments are not performing well, or if some hold sentimental value, you may be hesitant to redeem them.

The next option typically involves personal loans, credit cards, or modern financial products such as buy now pay later loans (BNPL). These are unsecured loans, meaning no collateral is required for approval, making them faster and easier to obtain than secured loans.

But if you desire a loan at a more favorable interest rate or wish to avoid liquidating your mutual funds, consider securing a loan against your mutual fund holdings instead. 

Loan Against Mutual Funds Advantages:

• Quick Access to Cash: Do you urgently need money? A loan secured by your mutual funds could save your life. Without having to sell it, you may take money from your investment.
• Keep Your Investments: It’s great to know that you can keep your mutual funds. They remain undamaged, and you still have the opportunity to profit if their value increases.
• Lower Interest Rates: Loans secured by mutual funds frequently have lower interest rates than other types of loans. In the long run, this can help you save money.
• Credit Score Is Safe: Since the loan is secured by your mutual funds, your credit score is unaffected.

• Obtain swift short-term financing during financial crunches.
• The repayment procedure remains straightforward, and the interest rate remains reasonable.
• You can utilize both debt and equity-based mutual fund holdings as collateral.
• While you might not redeem your holdings during the loan period, they stay within your account.
• You can conveniently apply for the loan online from the comfort of your home.
• The application process is user-friendly, involving minimal to no paperwork.
• Funds are disbursed promptly, which is particularly helpful in financial emergencies.

Loan Against Mutual Funds Disadvantages

• Risk to Your Investment: In order to reach the necessary margin, you could need to pledge more units or make partial loan repayments if the value of your mutual funds plummets. This is particularly nerve-wracking when the market is in turmoil.
• Possible Unit Sales: In severe circumstances, the lender might ask you to pledge more units or even sell some of them to pay off the debt if the value of your mutual fund falls dramatically. If you’re compelled to sell at a lower price as a result, this could result in a loss.
• Loan Amount Limit: Lenders normally only provide loans up to a specific portion of the net asset value of your mutual fund, frequently between 50 and 60%. Therefore, you might not receive the whole value.

How to secure a loan against your mutual fund holdings?

To acquire a loan, you must pledge your mutual fund units to a bank or non-banking financial institution (NBFC). These units can be in Demat or physical form. If in Demat form, you’ll need to pledge them with depositories like NSDL or CDSL. For physical units, the bank or NBFC will involve the Registrar and Transfer Agency (RTA), such as CAMS or Karvy, to place a lien on the units pledged.

It’s crucial to note that once your mutual fund units are pledged (on lien) to the bank or NBFC, you cannot redeem them until the loan is repaid. However, you retain ownership of the units and continue to enjoy their associated benefits.

Here are the key features of loans against mutual funds:

Swift Processing: The loan against mutual funds is swiftly processed once you establish a lien on your mutual funds from the fund house. A lien grants the bank or NBFC the authority to sell the units if you default. To obtain a lien, you must personally visit the fund house’s office.

Instant Funds: Once you submit the lien document, the loan amount is instantly credited to your account.

No Forced Liquidation: Importantly, even after obtaining a loan against your mutual funds, your investments remain intact. The mutual fund house will not liquidate your holdings.

Continued Earnings: Pledging your mutual funds does not interrupt your earnings, as you still maintain an investment in the scheme. Pledging units does not halt your returns.

Loan Limits: The loan amount you can secure depends on the type of mutual fund you hold. For example, equity mutual funds may allow up to 50% of the net asset value (NAV) as a loan, while debt mutual funds may permit up to 80% of NAV. These percentages can vary among banks and NBFCs.

Minimum and Maximum Limits: Banks and NBFCs set the minimum and maximum loan amounts against mutual funds. Typically, the minimum loan against mutual funds is Rs 50,000, while it can go up to Rs 20 lakhs for equity funds and Rs 1 crore for debt funds. For NBFCs, the limits can be even higher.

Interest Rates: Interest rates for mutual fund loans tend to be lower than those for personal or credit card loans, typically ranging from 11-15% annually.

Processing Fees: The processing fee for mutual fund loans is usually between 0-1%, which is less than that of other types of loans.

Eligibility: To be eligible for a mutual fund loan, you must be an Indian resident. NRIs, sole proprietors, partnership firms, private trusts, and both public and private companies can also avail of these loans, while minors are ineligible.

How Does a Loan Against Mutual Funds Work?

When you secure a loan against your mutual funds, they serve as collateral. This means the bank will hold them as collateral until you fully repay the loan. While you can continue to invest in the scheme and earn returns and dividends as usual, you cannot sell these units until the loan is repaid.

If you wish to book profits or withdraw funds from the mutual fund, you will need to repay the entire loan to regain full control. If you partially repay the loan, you can request the bank to release a portion of the lien, freeing up some units while the rest remain under the bank’s control. Failure to repay the loan allows the bank to sell the units to recover the outstanding amount. 

The loan amount depends on the type of mutual fund scheme you choose to pledge. Typically, you can secure approximately 50% of the value of pledged equity or hybrid mutual fund schemes (total value calculated as Net Asset Value (NAV) multiplied by the number of units), up to the maximum limit set by the bank or NBFC. For example, if your equity fund holdings are currently valued at Rs 50 lakhs, you can secure approximately Rs 25 lakhs as a loan against them. For debt mutual funds, you can obtain up to 80-85% of the value of the pledged schemes. Different lending institutions have varying margin requirements for loans against equity and debt mutual funds.

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