Apart from helping you build wealth over time, mutual funds also serve as security to obtain loans from lenders who provide competitive interest rates. Lenders use your investment value to determine loan amounts at competitive interest rates.
Numerous financial institutions, including banks, provide loans to customers who pledge their mutual funds. You can get funds without selling your investments. The strategy allows you to resolve urgent financial needs without breaking your future investment plan. Let us know about mutual fund loans along with their application criteria.
Loan Against Mutual Funds
Loan Against Mutual Funds (LAMF) functions as a secured loan. Your mutual fund units serve as security when you pledge them for this purpose. Funding from the lender depends on the present market value of your mutual funds. You will get returns until your mutual funds remain pledged.
How Does It Work?
The process of obtaining a loan through mutual funds involves using your MF units as security for bank or NBFC loans.
The loan process starts by submitting your application to a lender which provides this facility. After getting the documents, the lender establishes a lien on the MF units. Thus, one cannot sell or redeem them until the loan is fully paid back. The loan amount you will receive depends on the mutual fund unit type and their current market value.
"Once the approval process is over, the approved funds are sent directly to one's bank account. The loan repayment options include monthly instalments or single payment methods that the lender will determine. The lender holds control of your MF units until the loan is repaid. Your mutual fund holdings will become fully yours again once you repay the loan and the lien is removed," says Adhil Shetty, CEO of Bankbazaar.com.
Eligibility and Documents Required
The following conditions must be fulfilled in order to secure a loan against mutual funds:
1. You should be an Indian resident.
2. You need to have your mutual funds registered in dematerialised (Demat) form.
3. You need to demonstrate a stable income source which can support loan repayment.
4. In case all holders give their consent, jointly held mutual funds can also be pledged.
For the loan application process, you will need to present these documents:
1. KYC documents
2. Proof of income
3. Mutual fund statement from the registrar
4. Loan application form
Loan Amount and LTV Ratio
Depending on the types of funds pledged, i.e. equity fund and debt funds, the loan-to-value ratio for loan against mutual funds can range between 50 per cent and 90 per cent of the NAV (net asset value).
Interest Rates
Interest rates are lower in case of loan against mutual funds than those on personal loans. Lenders usually charge interest rates between 8% and 12% annually based on fund type and institution. The risk levels of mutual funds determine their interest rates since debt funds maintain lower rates than equity funds.
Risks and Limitations
When the value of your MF units decreases significantly, lenders may require partial repayment or additional collateral. The late repayment of loans results in both accumulated interest and penalty charges.
How to Apply Online
The process of applying for a mutual fund loan can be done by accessing lender services through their mobile applications or website portals:
1. Access your net banking account or mobile application by logging in.
2. Choose between "Loan Against Securities" and "Loan Against Mutual Funds" options from the available selections.
3. Share information about your mutual fund holdings.
4. You need to submit the required documents through the platform.
5. The submission process requires you to accept all conditions before sending your request.
The loan approval process takes up to 24 hours before funds reach your bank account through direct deposit.
A loan against mutual funds, thus, enables speedy funding at lower interest rates. Proper management of loan repayments remains essential to prevent financial difficulties. You need to verify all terms, together with risks related to your mutual fund units pledged, before securing a loan.
