Did you know you can take a loan against your mutual funds? Just like securing a loan with assets such as gold or real estate, you can use your mutual fund investments as collateral to get financing from banks and Non-Banking Financial Companies (NBFCs).
Life is full of uncertainties, and you might face a financial crunch due to expenses like home renovations, family weddings or medical emergencies. When that happens, you might be tempted to dip into savings or sell investments, even if it means incurring a loss. If these options aren’t sufficient, you might consider taking out a loan.
But before you consider those options, here’s another idea: take a loan against your mutual fund investments.
A loan against mutual funds is a type of secured loan where your mutual fund investments are used as collateral to obtain financing. The good news is that mutual funds stay in your possession, but the lender holds a lien on them until you repay the loan. Let’s say you have a mutual fund portfolio worth ₹10 lakh. Based on that, a lender might offer you a loan amounting to 60-80% of the portfolio’s value, i.e., ₹6 lakh to ₹8 lakh. If you require funds for a personal emergency, you can get a loan against mutual funds without selling them.
Key Features and Points to Consider Regarding Loan Against Mutual Funds
Here are some of the key features and things to remember before taking a loan against your mutual funds:
1. Not All Banks Give Loans Against All Mutual Funds
Many banks have specific policies regarding the mutual fund schemes they accept as collateral for loans. For example, SBI offers loans only against mutual fund schemes from SBI Mutual Fund. Similarly, HDFC Bank and ICICI Bank are selective, providing loans only against mutual fund schemes managed by asset management companies registered with Computer Age Management Solutions (CAMS). Axis Bank also has a curated list of mutual fund schemes on its website that are eligible for securing a loan. This selective approach ensures that banks can manage and mitigate risk more effectively.
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2. Quick Access to Funds
The loan approval process for mutual funds is generally faster than traditional loans because the asset valuation and collateral procedures are streamlined. This quick turnaround is especially beneficial in emergencies or time-sensitive situations where immediate cash flow is required. The speed at which you can secure the loan helps you address urgent financial needs without unnecessary delays.
3. Flexible Loan Amount
The loan amount you can borrow is typically based on a percentage of the current value of your mutual fund holdings. This percentage can vary among lenders, but generally ranges from 50% to 80% of the mutual fund’s market value. This flexibility allows you to access a substantial loan amount relative to the value of your investments. If your mutual fund portfolio is sizeable, you can obtain a significant amount of financing, which is useful for large expenses such as business investments or major repairs. However, there is an upper limit on the loan amount you can get. Like any type of loan, loans against mutual funds come with specific limits. Banks typically impose both maximum and minimum loan amounts. For example, major private banks such as ICICI Bank generally set the minimum loan amount at ₹50,000 and the maximum at ₹20 lakh for equity mutual funds and up to ₹1 crore for debt mutual funds. NBFCs often have higher limits. For instance, Aditya Birla Finance has a minimum loan amount of ₹25 lakh and a maximum of ₹10 crore. Similarly, Bajaj Finserv offers comparable limits, reflecting their ability to cater to larger borrowing needs.
4. Retention of Investment
This feature allows you to keep your investments intact and continue to reap their benefits, such as capital appreciation and income from dividends, while still accessing needed funds. It also ensures you don’t miss out on potential future gains.
5. Lower Interest Rates
Loans against mutual funds are generally offered at lower interest rates compared to unsecured loans because they are secured by collateral. The mutual fund units act as security for the loan, reducing the lender’s risk. Lower interest rates can result in significant cost savings over the life of the loan. This makes borrowing against mutual funds a cost-effective way to access funds, especially compared to higher-rate personal loans or credit cards.
6. No Need to Liquidate Investments
You don’t need to sell your mutual fund units to access funds which helps avoid potential capital gains tax and loss of investment growth.
How Does It Work?
Step 1: Application
You apply for a loan by approaching a financial institution such as a bank or a non-banking financial company (NBFC) that offers loans against mutual funds.
Step 2: Collateral Pledge
You pledge your mutual fund units as collateral. The lender assesses the value of these units and determines the loan amount based on their value.
Step 3: Loan Disbursement
Once the mutual funds are pledged and the loan is approved, the lender disburses the loan amount to you. The mutual funds are held by the lender as security against the loan.
Step 4: Repayment
You repay the loan in instalments as per the agreed-upon terms. Interest is charged on the loan amount, and the repayment schedule can vary.
Step 5: Release of Collateral
Upon full repayment of the loan, the lender releases the lien on your mutual fund units, allowing you to retain full control over them.
Who Can Apply?
Eligibility criteria can vary by lender but generally include:
- Ownership of Mutual Funds: You must own mutual fund units that are acceptable as collateral.
- Age: Typically, borrowers need to be at least 18 years old.
- Creditworthiness: Lenders may assess your credit history and financial stability to determine your loan eligibility.
- KYC Compliance: You need to comply with Know Your Customer (KYC) norms which involve submitting identification and address proof.
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Wrapping Up
Taking a loan against mutual funds offers a practical and efficient way to access capital while keeping your investments intact. Compared to credit card loans or personal loans, these loans often come with lower interest rates, making them a cost-effective choice. However, keep in mind that the interest rates on loans against mutual funds are generally higher than those for loans secured by gold or fixed deposits. Therefore, it is advisable to evaluate all available options and consider your financial situation before deciding to take a loan.
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DISCLAIMER: Mutual Fund investments are subject to market risks. Read all scheme related documents carefully. Registration granted by SEBI, membership of BASL (in case of IAs) and certification from NISM in no way guarantee performance of the intermediary or provide any assurance of returns to investors. Investments in securities market are subject to market risks. Read all the related documents carefully before investing. The securities quoted are for illustration only and are not recommendatory.
