If you are an investor seeking financial flexibility, exploring loans against mutual funds could be your answer. Here are some crucial insights for securing loans using your mutual fund investments as collateral.

What is a Loan Against ELSS Mutual Funds?

• ELSS stands for Equity Linked Savings Scheme, which is a type of mutual fund.
• A loan against mutual funds is when you borrow money from a lending institution with your mutual fund unit holding serving as collateral.
• It's a way to access funds without selling your investments.

1. Interest Rates and Charges

Interest rates for loans against mutual funds vary among lenders. Generally, they are lower than personal loans as the mutual fund units provide security. However, do compare interest rates and processing fees across different lenders before deciding.

2. Loan Amount Eligibility

The loan amount depends on the value of your ELSS mutual fund units. Lenders usually offer a percentage of your mutual fund units' net asset value (NAV) as a loan. The loan-to-value (LTV) ratio typically ranges from 50% to 70%.

3. Loan Tenure

Loan tenures for loans against ELSS mutual funds are usually shorter compared to regular personal loans. The tenure can vary from 6 months to 3 years. Choose a tenure that aligns with your repayment capacity and financial goals.

4. Repayment Options

Ensure you understand the repayment schedule and choose an option that suits your financial situation. You can opt for regular EMIs (Equated Monthly Installments) or choose to repay the loan at the end of the tenure.

5. Risks and Considerations

Before opting for a loan against ELSS mutual funds, consider the following:

• Market Fluctuation

The value of mutual funds can go up or down with market movements, affecting the collateral's value.

• Default Risk

If you fail to repay the loan, the lender may liquidate your mutual fund units, impacting your investments.

• Opportunity Cost

While repaying the loan, your mutual funds might miss potential market gains.

6. Process and Planning for LAMF

• Assess your needs to determine the loan amount and plan the repayment strategy.
• Research lenders by comparing interest rates, charges, and repayment terms.
• Apply for the loan by submitting the necessary documents, including proof of ELSS mutual fund ownership.
• The lender will assess the value of your mutual fund units to determine the eligible loan amount.
• Once approved, the lender will offer you the loan amount, interest rate, and repayment terms.
• Review the offer carefully.
• The funds are disbursed to your account upon acceptance of the loan offer.
• Ensure timely repayments to avoid any negative impact on your investments.

Wrapping It Up

Taking a loan against ELSS mutual funds can provide quick access to funds without selling your investments. However, consider the risks and choose a repayment option that suits you. But what if you do not have mutual funds to put up as collateral and need quick capital?

Fi to the Rescue

Fi Money provides instant loans that arrive directly in your savings account. These are pre-approved personal loans made available to select users with good credit scores. On Fi, this process is 100% paperless, and the loans are provided at competitive interest rates — where each user remains in control with complete visibility of all details. Plus, you can avoid EMI late fees by setting up automatic in-app payments. Our licensed partner bank assigns an eligible loan amount to each user (up to ₹5 lakh).

Frequently Asked Questions

1. Is it advisable to take a loan against mutual funds?

Taking a loan against mutual funds can be a viable option for accessing funds without liquidating your investments. However, it's essential to consider factors like interest rates, repayment terms, and potential market risks before applying.

2. How does a loan against mutual funds work?

When you take a loan against mutual funds, your fund units serve as collateral. The lender calculates the value of your fund holdings and offers you a loan amount based on a percentage of that value (loan-to-value ratio). The interest rate, tenure, and repayment terms vary among lenders.

3. What is the interest rate for a loan against mutual funds?

The lender determines loan interest rates on mutual funds, market conditions, and your creditworthiness. Rates are typically lower for secured loans. Compare rates from different lenders to find the best option.

4. What is the process of lien marking in mutual funds?

A lender can put a 'lien marking' on your mutual fund units, which stops you from selling or transferring them until the loan is repaid. The mutual fund's registrar and transfer agent (RTA) is informed about the lien, and the units are 'locked' until the loan is fully repaid. Once the loan is paid off, the lien is removed, and you can control your mutual fund units again.

5. What are lien marking charges?

The fees associated with the process of placing a lien on your mutual fund units are known as ‘lien marking charges’. These charges cover administrative and processing costs for implementing and removing the lien.