Unlocking loans against mutual funds

How to get a loan against mutual funds
23 Oct 2024

In the world of finance, getting a loan against mutual funds has become a go-to move for Indian investors who need cash but don't want to sell their investments.

This blog post breaks down the details of how to use your mutual funds to get a loan and gives you the information you need to make the right call.

Understanding the basics

A loan against mutual funds enables investors to access funds by using their mutual fund units as security.

Both banks and Non-Banking Financial Companies (NBFCs) extend this facility, granting a loan amounting to a certain percentage of the value of the units pledged.

The amount one can borrow generally falls between 50% and 80% of the value of equity funds and can reach up to 90% for debt funds.

Eligibility and process
Criteria

In order to avail a loan against mutual funds, investors need to hold units in dematerialized form or with registered transfer agents.

This is because the process requires marking a lien on the units you pledge in favor of the lender.

When you repay the loan, the lien is lifted, giving you full control over your investments again.

Interest rates and charges
Costs

Interest rates for loans against mutual funds are generally lower than those for personal loans, due to the secured nature of these loans.

However, lenders often charge processing fees and prepayment penalties.

This discrepancy highlights the importance of thoroughly comparing different lending options before making a decision.

Borrowers should closely examine these charges to identify the most cost-effective solution.

Advantages over selling units
Benefits

Opting for a loan against mutual fund units instead of selling them can be advantageous during market downturns or when you require short-term liquidity.

This approach shields investors from potential losses associated with selling at unfavorable prices.

Plus, it allows them to stay invested, potentially benefiting from market recoveries and earning dividends.

These are particularly important for long-term investment strategies.

Key considerations before applying
Caution

Before opting for a loan against mutual funds, investors should evaluate their repayment ability and be aware that in the event of a default, lenders possess the authority to liquidate the pledged units to retrieve outstanding payments.

One should also carefully consider how this decision aligns with their broader financial plan and objectives.