Investors who require funds on a short-term basis can now avail of loans against their mutual fund holdings without redeeming their investments. Banks and financial institutions are offering this service, enabling borrowers to pledge mutual fund units as collateral.
Eligibility Criteria
It is important to note that not all mutual fund schemes will be eligible for this loan option. Prospective borrowers will have to verify with their banks and Non-Banking Financial Companies (NBFCs) that offer loans against mutual funds. Lenders usually prefer large-cap equity funds, debt funds, or liquid funds, as these are considered less volatile.
Application Process
The loan application can be submitted online on the lender’s website or through a branch office. Investors are needed to fill out a loan application form along with details of their mutual fund holdings.
A few financial institutions offer digital loan processing via integrated platforms linked with registrar and transfer agents (RTAs) like CAMS and KFintech.
Pledging Mutual Fund Units
To avail of the loan, borrowers must create a lien on their mutual fund units in favour of the lender. This requires giving a lien request to the respective mutual fund house or depository. In cases where the holdings are in dematerialised form. Once the lien is established, the lender receives control over the pledged units as collateral.
Loan Disbursement
After verifying the pledged mutual funds holding, the lender sanctions the loan amount based on the Loan-to-Value (LTV) ratio. Typically, equity mutual funds are eligible for loans covering 50 per cent -70 per cent of their Net Asset Value (NAV), while debt funds may secure up to 80 per cent. Once approved, the loan amount is transferred to the borrower's account.
Key Considerations
Interest rates for loans against mutual funds are usually lower than those for personal loans, comparatively. However it can vary based on the lender and the type of mutual fund. Additionally, if the NAV of the pledged funds drops significantly, the lender may require the borrower to provide additional collateral or make a partial loan repayment.
