If you ever need cash to meet unexpected financial expenses urgently, you can always rely on various credit facilities and the good old - personal loans. But did you know that now, you can also avail of loans against securities?
Understanding how a loan against mutual funds operates allows you to access the cash you need without prematurely liquidating your investments or disrupting your financial plans. Let's delve into the details of a loan against mutual funds and how you can apply for it.
A loan against mutual funds (LAMF) is a secured credit facility that allows you to borrow funds by offering your mutual fund investments as security or collateral. Like any other secured loan, you must pledge your mutual fund units to the lender and borrow money against this asset.
The lending entity has a lien on the mutual funds pledged. So, during the repayment period, you cannot sell your mutual fund holdings and redeem your investments. However, you get more affordable interest rates, since the assets pledged reduce the lender’s risk.
Loans against mutual funds are typically processed extremely quickly. As soon as you get a lien on your mutual fund investments in favour of the bank or the NBFC, the lender will verify and process the loan application. The funds will also be credited to your account almost instantly.
Only select mutual fund schemes can be pledged as collateral for a loan. The exact list of eligible schemes may vary from one bank or NBFC to another. Before you apply for a loan against mutual funds, check the scheme eligibility details with your preferred lender.
Loans against mutual funds are secured loans with collaterals. So, the rates of interest levied on the principal are generally lower than the interest rates on unsecured loans like personal loans or credit cards. Nevertheless, it’s a good idea to compare offers before you proceed.
The upper limit of the loan that you can obtain is typically capped by banks as a fixed percentage of the NAV of the mutual fund scheme pledged. The percentage is usually higher for debt mutual funds than equity mutual funds. Check these limits before you apply for the LAMF facility.
If you default on the loan EMIs and fail to repay the loan, the lender can sell or redeem your mutual fund investments. The proceeds from the redemption will then be used to compensate for the default. This is why lenders require a lien on the asset pledged as collateral for the loan.
During the repayment tenure, your mutual fund investments will continue to grow depending on the market’s performance. You will consistently earn returns as per the terms and conditions of the scheme. The only restriction is that you cannot redeem your investments until the loan is fully repaid.
Now that you know what a loan against mutual funds is and how it works, you can avail of this credit facility if needed. Keep in mind that the exact terms and conditions of the loan vary from one bank or financial institution to another. So, ensure that you read the fine print before making a decision to borrow funds via this channel.
If you do not have any mutual fund investments yet, 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).
No, only investments in select schemes can be pledged to obtain a loan against mutual funds. The bank decides which schemes qualify.
The loan amount is typically fixed as a percentage of the Net Asset Value (NAV) of the investment pledged. This percentage varies from one lender to another.
The interest rate for a loan against mutual funds is typically nominal since this is a secured loan.
As long as the loan remains unpaid, you will not be able to sell your mutual fund units and redeem your investments.
There are no tax benefits or implications of loans against mutual funds. However, there is always the risk of not being able to liquidate your funds if you do not repay the loan on time.