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How to Get Loan Against Mutual Funds in India: Eligibility, Benefits and Features

Updated: Jan 31

Table of Content:

  • Introduction

  • Understanding Loan Against Mutual Funds

  • Eligibility for Loan Against Mutual Funds

  • How Much Loan Can You Avail?

  • Loan Application Process

  • Important Considerations for Loans Against Mutual Funds:

  • Key Features of Loan Against Mutual Funds

  • Conclusion


Get Loan Against Mutual Funds in India

In the unpredictable journey of life, sometimes financial emergencies hit us unexpectedly. It could be a medical crisis, a family wedding, or even a sudden home renovation. During such times, we often consider liquidating our investments, even at a loss. However, instead of selling off your mutual fund investments, a smarter alternative is to secure a loan against them. This article will walk you through the process of getting aLoan Against Mutual Funds, its eligibility, benefits, and features.

Understanding Loan Against Mutual Funds

As with other assets like gold or real-estate, your mutual fund holdings can act as collateral for securing a loan. Banks and Non-Banking Financial Companies (NBFCs) in India offer this facility that allows you to get access to quick funds without disturbing your investment portfolio.

Eligibility for Loan Against Mutual Funds

The eligibility criteria for availing a loan against mutual funds is quite straightforward. Not just individual investors, but also NRIs, firms, trusts, companies, HUFs and other entities can leverage this option. However, minors are exempted from this facility. It's important to note that the quantum of loan, tenure, and interest rate is determined by the lending institution based on various factors including the applicant's credit score.

How Much Loan Can You Avail?

The amount you can borrow against your mutual funds largely depends on the type of mutual fund scheme you have invested in and the lending institution. For instance, in the case of equity mutual funds, you can get a loan up to 50% of the Net Asset Value (NAV), and up to 80% for debt mutual funds.

Loan Application Process

The process of applying for a loan against mutual funds is simple. If your mutual fund units are in Demat form, many online portals provide instant approval for loans. However, if your funds are in physical form, you'll have to either convert them into electronic form or establish a loan agreement with the lender. In either case, you can apply for the loan online through internet banking or by visiting the nearest branch of the bank.

Important Considerations for Loans Against Mutual Funds:


Loan Limits: The amount you can borrow against your mutual funds depends on the type of scheme and financial institution. Banks like HDFC and ICICI offer loans up to 50-80% of NAV for equity funds and up to 85% for debt funds.


Banks' Selection Criteria: Not all banks provide loans against all mutual funds. Some banks, like SBI, HDFC, and ICICI, may limit loans to specific mutual fund schemes managed by certain registered asset management companies.


Loan Amount Limits: Loans against mutual funds have both minimum and maximum limits. For example, ICICI Bank sets the minimum at Rs. 50,000 and the maximum at Rs. 20 lakh for equity funds, with higher limits for debt funds. NBFCs often have higher limits.


Cost Advantage: Loans against mutual funds typically have lower interest rates (8-10%) compared to unsecured loans like personal loans or credit card loans. The interest rate may vary based on the bank and the type of mutual fund schemes pledged.


Continued Earnings: Pledging mutual fund units for a loan doesn't affect your investment returns, as the units remain in the market. The bank has the right to sell units only in case of default, allowing you to maintain your financial plan while accessing capital.


Key Features of Loan Against Mutual Funds

  • The loan is secured by a lien on mutual fund units. A lien is a legal claim or right that a lender has on the borrower's property until the debt is fully paid off.

  • The processing of the loan is instant, adding to the convenience of the borrower.

  • Both debt and equity funds are eligible for the loan.

  • The loan amount is limited to up to 50% of the NAV for equity-oriented mutual fund schemes and 80% for debt-oriented schemes.

  • Processing fee varies from nil to 1% of the loan amount depending on the lending institution.

Benefits of Loan Against Mutual Funds

Drawbacks of Loan Against Mutual Funds

Preserves Investment Portfolio: By availing a loan against your mutual funds, your investment portfolio continues to earn returns and stays intact.

Interest Rates: Loans against mutual funds have lower interest rates compared to personal loans or credit card loans, making them a cost-effective option.

Lower Interest Rates: As compared to personal loans or credit card loans, loans against mutual funds are secured and therefore come with lower interest rates.

Flexible Repayment: Repayment terms for such loans are generally more flexible compared to other types of loans, providing borrowers with greater convenience.

Flexible Repayment: The repayment terms for such loans are also generally more flexible as compared to other types of loans.

High-Interest Costs: Interest rates on loans against mutual funds are typically higher than loans against gold or fixed deposits, making them a relatively more expensive borrowing option.


Consideration Required: It's essential to weigh all options before deciding to take a loan against mutual funds due to potential drawbacks and higher interest costs.


Conclusion

While loans against mutual funds can be a great way to meet immediate financial needs without disturbing your investment portfolio, it's crucial to understand their terms and implications fully. Always consider your financial circumstances, as well as the benefits and drawbacks of such loans, before making a decision.

In the end, financial decisions should always align with your long-term financial goals. A loan against mutual funds can be a lifesaver in times of financial stress, but it should not derail you from your investment objectives. Always consider seeking advice from a professional financial advisor to ensure you are making the best decision for your financial future.


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