Investing in mutual funds is popular among individuals looking to grow their wealth over time. However, there may come a time when you need immediate funds for personal or business purposes. Instead of liquidating your mutual fund investments, you can opt for a loan against mutual funds. This option allows you to leverage your investments without disturbing your financial growth plan. Here’s everything you need to know about taking a loan against mutual funds.

What is a Loan Against Mutual Funds?

A loan against mutual funds is a secured loan where your fund units act as collateral. Banks and non-banking financial companies (NBFCs) offer this type of loan, allowing you to borrow a certain percentage of the value of your mutual fund holdings. This can be an efficient way to access funds without selling your investments prematurely.

How Does It Work?

When you apply for a loan against mutual funds, the lender marks a lien on the units of mutual funds you pledge. This means the mutual fund units remain in your name, but you cannot sell or redeem them until the loan is repaid. The loan amount you receive is typically a percentage of the current market value of the mutual fund units, known as the loan-to-value (LTV) ratio. The LTV ratio varies between lenders but usually ranges from 50% to 80%.

Types of Mutual Funds Eligible for Loans

Not all mutual funds are eligible for loans. Generally, lenders accept:

  • Equity Mutual Funds: Funds that invest primarily in stocks.
  • Debt Mutual Funds: Funds that invest in fixed-income securities.
  • Hybrid Mutual Funds: Funds that invest in a mix of equities and fixed-income securities.

The eligibility criteria and the LTV ratio can differ based on the type of mutual fund and the lender’s policies.

Advantages of Taking a Loan Against Mutual Funds

  1. No Need to Liquidate Investments: You can access funds without selling your mutual fund units, allowing your investments to grow.

  2. Quick Processing: The approval and disbursement process for a loan against mutual funds is typically faster compared to other types of loans.

  3. Lower Interest Rates: Since this is a secured loan, interest rates are generally lower than those for unsecured loans like personal loans or credit card advances.

  4. Flexible Repayment Options: Lenders offer various repayment options, including EMI-based repayment or bullet repayment, where you repay the entire amount at the end of the loan tenure.

  5. Retention of Ownership: You retain the ownership of your mutual fund units and continue to receive dividends or interest, if applicable.

Disadvantages to Consider

  1. Market Risk: If the value of your mutual fund units declines significantly, you may need to provide additional collateral or repay part of the loan to maintain the LTV ratio.

  2. Limited Loan Amount: The loan amount depends on the value of your mutual fund units, which may not be sufficient for your needs.

  3. Pledge Charges: Some lenders may charge a fee for marking a lien on the mutual fund units.

Eligibility Criteria

The eligibility criteria for a loan against mutual funds typically include:

  • Age: Applicants must be within a certain age range, usually between 21 and 60 years.
  • KYC Compliance: Applicants must complete the Know Your Customer (KYC) process.
  • Credit Score: A good credit score can improve your chances of approval and may result in better interest rates.

How to Apply for a Loan Against Mutual Funds

  1. Choose a Lender: Research various banks and NBFCs to find a lender offering favorable terms and conditions.

  2. Submit an Application: Fill out the loan application form, providing details about your mutual fund investments and personal information.

  3. Lien Marking: The lender will initiate the process to mark a lien on your mutual fund units.

  4. Approval and Disbursement: Once the lien is marked, the lender will disburse the loan amount to your bank account.

Repayment Options

Repayment options for loans against mutual funds are generally flexible:

  • EMI-Based Repayment: You repay the loan in Equated Monthly Installments (EMIs) over a fixed tenure.
  • Bullet Repayment: You repay the entire loan amount at the end of the loan tenure, which is suitable for borrowers expecting a lump sum inflow of funds in the future.

Conclusion

A loan against mutual funds can be a smart way to access funds without disrupting your investment strategy. It offers a blend of quick access to capital, lower interest rates, and the benefit of retaining your investment portfolio. However, it's essential to consider the potential risks and costs involved. By understanding the terms and conditions and evaluating your financial needs, you can make an informed decision that aligns with your financial goals.