How Does Loan Against Mutual Funds Work? – Types And How To Apply?

In today’s financial landscape, flexibility and access to liquidity are crucial for managing both planned and unforeseen expenses. One effective way to achieve this without compromising investment strategy is through loans against securities. This financial instrument leverages existing investments to secure a loan, offering a convenient and efficient means to meet financial needs.

 

 

Loans against securities are secured loans in which financial assets—such as stocks, mutual funds, bonds, or other marketable securities—are pledged as collateral to obtain funding. Unlike traditional loans, which often involve extensive documentation and lengthy approval processes, loans against securities provide a more streamlined and faster way to access funds. This type of loan is particularly advantageous for investors who want to avoid selling their assets as it allows them to retain ownership while leveraging their securities to secure the loan.

 

Benefits of Loans Against Securities

 

1. Preservation of Investments: Borrowers can maintain ownership of their securities such as stocks or mutual funds, avoiding potential losses from selling during unfavourable market conditions. By not selling the securities, investors can continue to benefit from any potential appreciation in their value, maintaining long-term growth in their investment portfolio.

2. Flexible Loan Amounts: The loan amount is typically determined based on the market value of the pledged securities, providing borrowers with flexibility in how much they can borrow. Some loans allow for a margin facility, enabling investors to borrow against multiple types of securities, further enhancing liquidity options.

 

3. Lower Interest Rates: Because these loans are secured by collateral, they usually come with lower interest rates compared to unsecured loans, making them a cost-effective borrowing option.

 

4. Tax Benefits: In some cases, the interest paid on loans against securities may be tax-deductible, providing additional financial advantages.

 

Online Loan Against Mutual Funds

 

One specific type of loan against securities is an online loan against mutual funds. Mutual funds are a widely used investment vehicle that pools capital from multiple investors to create a diversified portfolio of stocks, bonds and other securities. By pledging mutual fund units as collateral, a loan can be secured without needing to redeem investments. Online loan against murtual funds can be especially beneficial during market volatility as selling mutual fund units at unfavourable prices may not be ideal.

 

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Types of Loans Against Mutual Funds

 

1. Overdraft Facility: An overdraft facility enables an investor to withdraw funds up to a predetermined limit whenever needed. This type of loan offers flexibility, as interest is only paid on the amount actually utilized, making it an efficient solution for managing short-term cash flow needs. For instance, if an investor has a mutual fund portfolio valued at ₹10 lakh, they might be granted an overdraft limit of ₹5 lakh. The investor can draw any amount within this limit, and interest is charged only on the portion used, allowing for cost-effective borrowing.

 

2. Term Loan: A term loan is a fixed amount lent to an investor for a specific period, typically accompanied by a structured repayment schedule. This type of loan is well-suited for funding larger expenses, such as purchasing a vehicle, financing home renovations, or covering education costs. The interest rate on a term loan against mutual funds is generally lower than that of an unsecured personal loan, making it a cost-effective option. For example, if an investor pledges mutual funds worth ₹5 lakh, they might be eligible for a term loan of ₹3 lakh, repayable over a period of 3 years.

 

3. Flexi Loan: A flexi loan combines the features of both an overdraft facility and a term loan. It provides repayment flexibility, allowing an investor to pay interest only on the amount utilized, with the option to prepay or redraw funds as needed. This type of loan is ideal for investors who require a revolving line of credit, enabling multiple withdrawals and repayments. For example, if an investor takes a flexi loan of ₹4 lakh against their mutual funds, they can withdraw and repay amounts within this limit based on their financial needs.

 

4. Margin Loans: Margin loans allow investors to borrow against their mutual fund investments while maintaining a specific level of equity in their portfolio. This type of loan is particularly popular for margin trading where investors can leverage their existing assets to amplify potential returns. For example, if an investor has mutual funds valued at ₹10 lakh, they may be able to borrow a percentage of that value to invest in additional securities. However, it is essential to maintain a certain equity threshold, if the value of the investments falls below this level, the lender may issue a margin call, requiring the investor to either deposit more funds or sell some assets to reduce the loan balance. This form of borrowing can enhance investment opportunities but also carries significant risks as it magnifies both potential gains and losses.

 

5. Personal loans: These are specifically secured by an investor’s mutual fund holdings. This type of loan offers flexibility in how the borrowed funds can be used, allowing investors to access cash for various purposes such as medical expenses, home renovations or educational costs without liquidating their investments. Typically, lenders assess the market value of the pledged mutual funds to determine the loan amount which can be a percentage of that value

 

How to Apply for a Loan Against Mutual Funds?

 

Applying for a loan against mutual funds is a straightforward process. Here are the general steps involved:

 

1. Choose the Lender: Begin by researching and selecting a financial institution that offers loans against mutual funds. Common providers include banks, non-banking financial companies (NBFCs) and online lending platforms.

 

2. Check Eligibility: Verify the eligibility criteria set by the lender. This may include minimum and maximum loan amounts, available tenure options and the types of mutual funds accepted as collateral.

 

3. Submit Application: Complete the loan application form, providing details about mutual fund holdings, personal information and the desired loan amount.

 

4. Pledge Mutual Funds: The lender will require the investor to pledge mutual fund units as collateral. This is typically done by submitting a lien request to the mutual fund company or through an electronic lien marking process.

 

5. Loan Disbursement: Once the lien is marked and the collateral is accepted, the loan amount is disbursed to the investor’s account. This disbursement process is usually quick, often completed within a few days.

 

Wrapping Up

 

Loans against securities, including those against mutual funds (online loan against mutual funds) serve as a valuable financial tool for investors looking to access liquidity without disrupting their investment strategy. By leveraging existing assets, investors can obtain funds at favourable interest rates while retaining ownership of their investments and avoiding immediate tax implications. Whether the need is for personal expenses, business requirements, or new investment opportunities, loans against mutual funds provide a versatile and efficient solution.

 

 

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