How to Apply for Loan Against Mutual Funds – Benefits & Eligibility
Using your investments as collateral for loans
Occasionally, you must have felt an urgent need for money due to some medical emergency or other emergencies. To meet urgent financial requirements, most of us liquidate our assets, such as gold, fixed deposits, shares, mutual funds, etc. However, rather than liquidating an investment, you can offer it as collateral to a bank or a financial institution and take a secured loan against it. This article will focus on what a loan is against mutual funds and how to apply for it.
What is a loan against mutual fund?
A loan against MF is a secured loan taken from a bank or a financial institution by offering mutual fund units as collateral or security against the loan. Since the loan is taken against the security of mutual fund units, it is also known as a secured loan. In a loan on mutual fund, you will have to pledge the mutual fund units to the bank or financial institution offering the loan.
The loan is offered in the form of an overdraft. It means you can withdraw how much every amount you want from the loan amount as per your requirement. You will be charged interest only on the amount withdrawn.
Loan against mutual fund interest rate
As the loan against a mutual fund is a secured loan, the interest charged on it is lower than personal loans that are unsecured in nature. Also, you pay interest only on the loan amount that you withdraw from the overdraft account. The amount offered as a loan will depend on the mutual fund units that you offer as security.
For example, financial institutions offer a higher amount as a loan against debt mutual fund units. Some financial institutions offer up to 80% of the debt fund units' value as a loan. In the case of equity mutual funds, the amount offered as a loan is lower. Some financial institutions offer 50-60% of the equity fund units' value as loans.
Lien on mutual fund units
As discussed earlier, you will have to pledge the mutual fund units to the financial institution for a loan against them. The financial institution will ask the market intermediary such as CAMS or Karvy to mark a lien on the mutual fund units pledged as security for the loan.
Once a lien is marked on the mutual fund units, you will not be able to redeem them. However, you will continue to benefit from the increase in the NAV, and the dividends declared on it.
How to apply for a loan against mutual fund units?
To apply for a loan against mutual fund units, you will have to submit the loan application with the bank or NBFC along with the details of the mutual fund units you hold. The financial institution will assess the value of the mutual fund units and apply the loan to value (LTV) ratio. They will arrive at the amount that can be given as a loan. They will ask CAMS to mark a lien on the mutual fund units.
The bank will then open an overdraft account with the loan amount. You can use the loan amount as and when you need it. You will be charged interest only on the amount that you utilise.
Availability of loan against mutual fund
Banks and NBFCs provide a loan against mutual fund units. These days, some fintechs are also providing loans against mutual funds. As fintechs and private banks use the latest technology, the loan application processing is faster at their end.
Some banks provide loans against mutual fund units only against the mutual fund units of the AMC that is their subsidiary or sister concern. Some banks provide a loan against mutual funds for units of AMCs that are managed by CAMS only. Banks and NBFCs have minimum and maximum amounts that can be given as loans against mutual fund units.
How and when to remove the lien
Once you have repaid the loan and the tenure has ended, you can make an application to the bank to close the loan. After verifying the loan principal and interest repayment, the bank will ask CAMS or Karvy to remove the lien from the mutual fund units. The loan account will then be closed. The mutual fund units will be free, and you can use them as your desire.
Benefits of borrowing against mutual fund units
When you take a loan against mutual fund units, you can get a loan at a lower interest rate than a personal loan. A loan against mutual fund units is secured in nature compared to an unsecured personal loan.
When you take a loan against the mutual fund units, you continue to enjoy the upside in the value of the units even though there is a lien marked against them. You will also continue to enjoy the dividends and the benefits of any other corporate actions on the mutual fund units.
A loan against mutual fund units is better than redeeming them
When you need money during a financial emergency, it is always better to go for a secured loan against the mutual fund units rather than redeeming them. When you take a loan, you continue to own the mutual fund units and enjoy their benefits. Once you repay the loan, the mutual fund units will be free from the lien, and you can use them however you want.