Everything in life is uncertain. So, you can go through a temporary financial crisis once in a while due to different reasons. For instance, it could be due to education, the building of a home, a medical condition, and more. In such a down-and-out situation, the first option is to make use of your savings and spend your investments even at a loss. And if that is still not making an impact, you will have to take a loan.
Although, selling your investments is not the best idea. In place of selling your mutual fund investments, you can obtain a loan on mutual funds. Yes, You read that right! Just as you can take a loan on other assets like gold and real estate, you can also obtain a loan against MF (mutual fund).
In this article, we are going to tell you everything you need to know about taking a loan against Mutual Funds.
What is a Loan Against Mutual Funds?
Loan Against Mutual Funds (LAMF) is a monetary solution that enables you to make a short-term loan facility against your mutual fund units.
The loan is achievable as a short-term facility, enabling you to get the funds you require and repay them at any time without any extra charges. Interest is imposed only on the utilized amount, and for the time, the funds are used.
You can choose from different sanctioned mutual funds from different asset management companies (AMCs) in India and can make use of them as collateral. CAMS and Kfintech (formerly known as KARVY) are the primary Registrars & Transfer Agents (RTAs) for mutual funds in India. You can use mutual funds registered with these RTAs as collateral to place a lien.
Loan Against Mutual Funds Eligibility
The whole process is virtual from first to last! You can easily get a loan against mutual funds online, removing the requirement of submitting any physical documents. You can apply for a limit, withdraw funds, and repay the utilized amount at your fingertips by making use of the mobile app, without standing in a long queue in a bank.
- One should be an Indian resident.
- One should have a valid PAN and Aadhaar Card.
- Have an active email address and phone number.
- Have a bank account with a cheque copy for linking.
- Indian citizens aged 18 to 75 years with a credit score of 500 or more.
- A single PAN card can have up to 2 loan accounts, one each against equity and debt mutual funds.
- Hindu Undivided Families can apply if they have Debt Mutual Funds.
How To Get Loan Against Mutual Funds – Things To Consider
- You Can Obtain a Loan Only Up to a Limit of Your Mutual Funds Holdings
The amount of loan you can obtain against your mutual fund holdings significantly depends on the sort of mutual fund scheme you have invested in and the finance company from which you will borrow.
For example, banks like HDFC and ICICI provide you with a loan of up to 50% of the Net Asset Value (NAV) in the condition of equity mutual funds and up to 80% in the condition of debt mutual funds. Axis Bank, on the other hand, provides a loan of up to 85% of the worth of your debt mutual schemes and 60% of the value of your equity mutual fund scheme.
- Not Every Bank Provide Loan Against All Mutual Funds
Many banks lend money to only one set of mutual fund schemes chosen by them.
For example, SBI only provides loans against mutual schemes of SBI Mutual Fund. HDFC Bank and ICICI Bank are also very particular about the schemes on which they lend money. Both private banks offer loans on mutual fund schemes controlled by asset management companies having Registrar and Transfer Agents as Computer Age Management Solutions Private Limited (CAMS).
Likewise, Axis Bank has curated a set of mutual fund schemes on its website on which it lends money.
- There Is A Upper Limit on the Loan Amount You Can Get
Like any type of loan, there are certain limits in loans against mutual funds as well. Many banks have a maximum and minimum limit on the amount of loan you can get.
Similar to any kind of loan, there are particular limits in loans against mutual funds. Many banks have the highest and lowest limit on the amount of loan you can get.
For example, most private banks like ICICI Bank have fixed the minimum loan amount at Rs 50,000 and the maximum amount at Rs 20 lakh in the condition of equity mutual funds and up to Rs. 1 crore in the condition of debt mutual funds.
If we talk about NBFCs, both the minimum and maximum limits are generally higher. For example, the minimum loan amount at Aditya Birla Finance is Rs 25 lakh and the highest is Rs. 10 crore. Bajaj Finserv follows the same as well.
- Loans On Mutual Funds Don’t Cost Much As Compared to Personal Loans And Credit Loans
A big benefit of getting a loan against mutual funds is that the interest rate is lower than for credit cards or personal loans. This is because the loan is secured by your mutual funds, which means it is backed by collateral.
- You’ll keep Earning Returns on the Mutual funds Units You’ve Pledged.
When you pledge your mutual fund units to get a loan against them, those units continue to be invested in the market. This is because when you pledge your mutual fund units at a ban, you provide the bank the authority to sell the mutual fund units only in case you miss any payments. As long as you don’t miss any payments, your investments stay connected to the market, and you keep earning returns on them.
Thus, it makes certain that your finances are still untouched and simultaneously you get to raise the most-required capital on short notice without withdrawing any units.
- Apply Online and Get an Overdraft Limit
By making use of technology, many banks like SBI, HDFC, and ICICI now offer loans against your mutual funds online. You can pledge your mutual fund units online and set up an overdraft limit in your bank account.
An overdraft lets you withdraw more money than you have in your account up to a set limit. For example, if your overdraft limit is Rs. 2 lakh and you have Rs. 50,000 in your account, you can withdraw up to Rs. 2.5 lakh. You will need to pay interest on the amount you borrow.
Conclusion
When there is a breakdown market, it is good to take a loan in place of redeeming the units by making your loss. You can try for a loan, which can end up as more advantageous.
By conducting this, you have not liquidated your fund and when the market comes in a good condition, the value of your mutual fund will elevate again. In a bull market where all funds give profit, experts suggest that it is much better to sell the units in place of borrowing. If you are in a bull run, you can redeem your mutual fund investment to meet short-term liquidity needs. You can opt for a loan against the mutual fund for market correction.
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Disclaimer – This article is for educational purposes only and does not intend to substitute expert guidance. Mutual fund investments are subject to market risks. Please read the scheme-related document carefully before investing.
