Naturally, mutual funds are taken into consideration for liquidation because they are simple to redeem. You can also possibly use mutual funds to raise money to pay for expenses while preventing early redemptions. In this case, taking out a loan secured by mutual funds can be quite beneficial for you. Let’s discuss what exactly a loan against a mutual fund means, how it works, the advantages, how to apply for one, and whether a loan against a systematic investment plan (SIP) is possible.
What Is a Loan Against Mutual Funds?
In simple words, a loan against mutual funds (LAMF) is a kind of secured loan that allows you to borrow money by using your mutual fund investments as collateral. By doing this, you lower the lender’s credit risk and lower your interest rates as well. This option gives you liquidity without having to redeem your entire mutual fund investment. Typically, LAMF is provided as an overdraft facility, in which you are granted a credit limit based on the mutual funds pledged.
How Does a Loan on a Mutual Fund Work?
A LAMF works on the simple idea that you can borrow funds by pledging your mutual fund holdings to a bank or a financial institution. The idea of lien marking is a crucial part of a LAMF. The lender imposes a lien on your mutual fund units when you pledge them as security for the loan. In the unlikely scenario that you are unable to repay the loan; the lender will have a legitimate claim to your mutual funds. You still own the mutual funds, though, and you are still eligible to receive returns like dividends or capital gains even with the lien in place. While you maintain complete ownership over the loan until repayment, the lien just serves as a protection for the lender, guaranteeing that they can reclaim the money if necessary. Apart from this, there are three key points to keep in mind about a LAMF:
- Cheaper than personal loans: These are often cheaper than personal loans because they are backed by your mutual fund holdings as collateral, hence reducing the risk for the lender.
- Limit on funds: The amount of money you can borrow depends on the bank or financial institution you decide to borrow from, as well as how the bank assesses your mutual fund portfolio. The net asset value (NAV) of your mutual funds and the type of funds you have invested in are typically assessed by the lenders. They give loans against a specific proportion of the NAV, considering this assessment.
- Continue to earn returns on your holdings: Even after you offer your mutual funds as collateral, they continue to be invested in the market. This means that any appreciation of funds, you will still directly benefit from it.
Loan Against SIP – Is It Possible?
It is indeed a possibility to take a loan against an SIP. It’s interesting to note that you can access your SIP investments whenever you need money. By using the mutual fund units you’ve accrued through SIP investments as collateral, you can obtain a loan through the SIP. The ability to obtain funding without needing to sell your assets is the technique’s greatest benefit.
When you choose a SIP loan, you supply the lender your mutual fund units, and after evaluating their value, the lender makes a loan offer based on a percentage of those units, usually between 50% and 70%. Even while you pay back the loan using flexible repayment options, your SIP investments keep growing without interfering with your plans to accumulate wealth. A loan against an SIP comes with many benefits, like quick access to money, lower interest rates, interest is paid only on the used amount, it is flexible to repay, great for short-term needs, and of course, your investment’s growth isn’t affected.
Interest Rates on Loan Against Mutual Funds
Different banks/NBFCs have varying interest rates and fees. Below is a summary of the interest rates that certain banks offer.
| Bank | Interest Rates (p.a.) |
| State Bank of India | 10.5 % |
| Bajaj Finance | Up to 20 % |
| Tata Capital | 8%-20 % |
| Axis Bank | 11.49%-13.75% |
| Canara Bank | 15.80% |
How to Get a Loan Against Mutual Funds
There is a set process you need to follow to apply for a loan against your mutual funds. Let’s break that process down.
- Assess the NAV of mutual funds: Understanding the NAV will help you check if your mutual fund holdings are eligible for a loan or not.
- Pick a lender: Choose between various financial institutions or banks, whichever works best for you in terms of loan terms, interest rates, and loan disbursements.
- Complete the application: Fill out the application form along with any required documents like mutual fund account statement, identity proof, and address proof, on the lender’s online portal or at the bank branch.
- Disbursement of funds: The loan amount will be disbursed or released in a few days once all paperwork is in order, the lender accepts your application, and you pledge your mutual fund units.
Advantages and Risks of Borrowing Against Mutual Funds
Before you decide to take a loan against your mutual fund investments, you need to understand the pros and cons of doing so. You need to understand how it could affect your investment, and anything to keep watch for.
Advantages of Borrowing Against Mutual Funds
- Quick and easy access to funds: One of the primary perks of this process is the ability to access funds quickly and easily. By pledging mutual fund units and establishing an overdraft limit, the loan can be obtained immediately. This term loan is a hybrid. When compared to conventional loan processing, this saves time.
- Flexible interest payment: The loan account must be credited each month to cover interest. However, interest is only assessed on the loan amount that is used, not the total amount that has been approved. Because of this, the interest rate is flexible.
- Faster availability than other loans: Unlike other loans, which have longer waiting periods, money from a loan secured by mutual funds can be credited in as little as one day, making it perfect for urgent situations.
- Lower interest rates: Compared to other loan options like credit cards and personal loans, the interest rate on the loan secured by mutual funds is lower. As a result, EMIs are reduced, and they are more affordable.
Risks of Borrowing Against Mutual Funds
- Interest costs: Interest rates that you must pay can drastically affect your returns.
- Liquidity risk: If the NAV goes down significantly, lenders could restrict withdrawals or ask you to sell your units.
- Tax implications: Borrowing does not result in capital gains tax, unlike selling, but not repaying can lead to forced redemptions and tax obligations.
- Limited eligibility: Only debt/hybrid funds and large-cap equity funds are eligible; small-cap or sectoral funds are rarely recognized.
Conclusion
In essence, you can borrow money when you need it by using your assets in mutual funds as collateral. However, keep in mind that to receive your mutual funds back and keep holding or redeeming them without incurring further fees, you must repay the loan in full. This loan should only be used if you need the money immediately for any expenses; it should not be used for speculative or risky investments like stock market trading.
FAQs
How much loan can I get against my mutual fund holdings?
If you meet the eligibility criteria, you can borrow up to 70% of the mutual fund’s net asset value, depending on the type of the fund. NAV stability is used by lenders, such as banks and NBFCs, to impose limitations. Verify the terms; some limit withdrawals until they are paid back.
What documents are needed to apply for a loan on a mutual fund?
You need to submit the following documents to avail a loan against mutual funds to avail a loan against mutual funds: PAN Card, address proof, identity proof, and verification of signature.
Are SIP mutual funds eligible for loans?
Yes, SIP holdings are eligible for loans if they meet the following criteria: they are debt/hybrid or large-cap equity funds, they have completed the 1-year lock-in, and they meet the lender’s LTV ratio of around 50% to 70%.
What is the interest rate range for a loan against mutual fund units?
A loan secured by mutual funds typically has an interest rate between 9% and 15%. Depending on the bank or NBFC, the loan amount may be as low as Rs 25,000 or as high as Rs 5 crore.
Is there any risk in taking a loan against mutual funds?
Risks associated with taking out a loan against mutual funds include forced redemptions with tax consequences, high interest rates (9–15%), limited access to pledged units, and margin calls if the NAV declines. The expenses and volatility concerns make it less appropriate for long-term requirements, even while it is helpful for short-term liquidity. Before taking out a loan, always evaluate your ability to repay.
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