In times of financial urgency, liquidating investments may not always be the best option. A loan against mutual funds (LAMF) allows investors to unlock the value of their investments while continuing to benefit from potential market appreciation.

This financial solution is gaining traction among borrowers seeking quick and convenient credit without selling their assets. If you are considering availing of this facility, here are five must-know features that can help you make an informed decision.

Quick and Hassle-Free Loan Approval

One of the most attractive features of a loan against mutual funds is the swift and straightforward approval process. Unlike traditional loans, which often require extensive documentation, LAMF is a secured loan where your mutual fund holdings serve as collateral.

Since financial institutions already have a tangible security in the form of mutual funds, they expedite the verification and approval process, often disbursing funds within 24 to 48 hours.

Many banks and NBFCs (Non-Banking Financial Companies) offer digital loan applications where borrowers can pledge their mutual fund units online. This digital convenience reduces paperwork and saves valuable time, making it an excellent option for those in urgent need of funds.

Flexible Loan-to-Value (LTV) Ratio

The Loan-to-Value (LTV) ratio is a critical factor in determining the loan amount you can avail against your mutual fund investments. The LTV ratio varies based on the type of mutual funds:

• Equity Mutual Funds: Generally, lenders offer up to 50% of the Net Asset Value (NAV) as a loan.
• Debt Mutual Funds: Since debt funds are considered less volatile, lenders offer a higher LTV, typically up to 80% of the NAV.

The lender determines the LTV based on market conditions and risk assessment. Borrowers must keep in mind that fluctuations in market value can impact the available loan limit, and they may need to provide additional collateral in case of adverse market movements.

Interest Rates and Repayment Options

Interest rates on loan against mutual funds are relatively lower than unsecured personal loans. The rates typically range from 8% to 12% per annum, depending on the lender, type of mutual funds pledged, and borrower profile. Since it is a secured loan, lenders are willing to offer competitive rates, making it a cost-effective borrowing option.

Repayment is flexible, and borrowers can opt for interest-only payments during the tenure, with the principal amount payable at the end of the loan term. Some lenders also allow prepayment without additional charges, giving borrowers the freedom to repay the loan early if they have surplus funds.

No Impact on Mutual Fund Ownership and Returns

One major advantage of a loan against mutual funds is that you continue to remain the owner of the pledged units. Unlike selling, where you completely lose ownership and potential future gains, pledging allows your investment to remain intact and grow over time.

While the pledged units are held as collateral, they remain invested in the market. If your mutual fund value appreciates during the loan tenure, you still benefit from the price appreciation, dividends, and bonus units (if applicable). However, you cannot redeem or sell the pledged units until the loan is fully repaid.

Minimal Documentation and No Credit Score Dependency

Traditional loans, such as personal loans or home loans, require extensive documentation and a good credit score for approval. In contrast, a loan against mutual funds has minimal documentation requirements. Lenders typically require:

• PAN card and Aadhaar card
• Mutual fund statement or folio details
• Bank account details for disbursal and repayment

Since the loan is backed by collateral, lenders do not place much emphasis on the borrower’s credit score. This makes LAMF an ideal borrowing option for individuals who may have a low credit score but possess substantial mutual fund investments.

Why Choose a Loan Against Mutual Funds?

Borrowers opt for LAMF for various reasons, including:

• Lower Interest Rates: Compared to personal loans and credit cards, LAMF offers a lower interest rate.
• Quick Access to Funds: Digital processing ensures fast loan disbursal.
• Retain Investment Benefits: Investors continue to benefit from capital appreciation.
• Flexible Repayment Options: Interest-only payments and zero prepayment charges provide financial ease.
• No Need to Sell Investments: Helps investors avoid premature redemption and tax implications.

Things to Consider Before Taking a Loan Against Mutual Funds

Before opting for LAMF, borrowers should be mindful of the following:

• Market Fluctuations: If the NAV of pledged units falls significantly, lenders may ask for additional collateral or partial repayment.
• Processing Fees: Some lenders charge processing fees, which can vary between 0.5% to 2% of the loan amount.
• Limited Tenure: LAMF is usually offered for a short tenure, typically ranging from 6 months to 3 years.
• Pledge Restrictions: Not all mutual fund units are eligible for pledging. Check with your lender to confirm the accepted schemes.

Conclusion

A loan against mutual funds is an efficient and convenient way to access liquidity without disturbing long-term investments. With quick approval, low interest rates, and continued ownership of assets, it serves as an attractive alternative to traditional borrowing methods.

However, borrowers must evaluate factors such as LTV ratio, repayment flexibility, and associated costs before availing of this facility. By making an informed decision, you can effectively leverage your investments while maintaining financial stability.