You may have planned your finances well, appropriately budgeted, and made investments. However, a requirement for funds can arise at any moment. In such unforeseen situations, it is necessary to make the correct financial decisions. Many individuals might consider selling a part their investments, such as mutual funds, in such situations. This can be avoided by taking a loan against mutual funds. In this article, we will learn what a loan against a mutual fund is and the eligibility for a loan against mutual funds.
Loans can be secured or unsecured. Secured loans are loans that are given against collateral, such as gold or real estate. A loan against mutual funds is a type of secured loan that is given against an individual's mutual fund investments.
Through a loan against a mutual fund, individuals can get funds for contingencies while staying invested in mutual funds. Individuals can pledge their mutual fund units and get a loan, which is a certain percentage of the investment’s value.
For example, if an individual has mutual fund investments of ₹10 lakh, a bank or NBFC might offer a loan of ₹8.5 lakh against the mutual fund investments.
In order to apply for a loan against a mutual fund, it is important to check the loan against mutual fund eligibility.
Typically, the age requirements are 18-65 years old. However, some banks and financial institutions also offer loans to individuals over the age of 65.
To be eligible for a loan against a mutual fund, you must be either salaried or self-employed but this varies based on the criteria by the bank/ NBFC.
The approved list of mutual funds varies from lender to lender. Typically, equity, debt, hybrid and even ELSS Mutual funds (after the lock-in period) are allowed to be pledged.
Minimum loan amount can be as low as ₹20,000, and the maximum loan amount can range between ₹10-20 lakh for equity funds and can go up to ₹15 crore for debt funds.
KYC documents like Aadhar or PAN are required. Some lenders may set a minimum credit score requirement; however, since the loan is given against the mutual fund units, a high credit score may not be required.
Applying for a loan against a mutual fund can be an easy process. Keeping the required documents handy can help streamline the experience.
Stay Invested
The primary benefit of a loan against mutual funds is that it allows you to stay invested while borrowing money. An individual can gain access to funds while their investments continue to grow.
Affordable Interest Rates
The interest rates on loans against mutual funds can be as low as 9% to 12% per annum. If your mutual fund’s value grows, you may be able to cover the interest costs.
Interest of Utilised Amount
Although you may be eligible to avail a larger pre-approved loan against a mutual fund, some banks and financial institutions only charge interest on the amount that you actually utilise, additionally, the interest is only charged on the no. of days the amount was withdrawn for.
Loan Against Equity and Debt Funds
Individuals can pledge both equity and debt mutual funds to secure a loan. In the case of debt mutual funds, the loan amount sanctioned is often higher. Since banks and financial institutions accept a wide range of mutual funds, obtaining a loan against them is relatively simple. Typically, lenders offer up to 50% of the value for equity mutual funds and up to 80% for debt mutual funds, though the exact percentage may vary depending on the lender.
Potential for Increased Credit
Certain lenders may offer borrowers the opportunity to borrow more money if the value of the mutual fund increases. This allows borrowers to borrow more money against the same mutual fund.
Minimum Documentation
The process of taking a loan against mutual funds is easy, quick, and convenient. Usually, the process is completely digital and requires minimal documentation.
Before applying for a loan against a mutual fund, there are several key considerations to keep in mind.
Know the minimum and maximum loan amounts that are offered. Moreover, knowing the maximum loan amount for both equity and debt funds can help you plan your finances more effectively.
A loan against a mutual fund involves the pledging of your mutual fund investments. If you default on the loan, the bank may redeem the mutual fund units to recover the loan amount. If you repay the loan, the mutual funds are unpledged and returned to you.
Market fluctuations impact mutual funds. It is important to analyse the prevailing market conditions and borrow funds accordingly.
Check the loan application process, costs, and charges. Compare them with banks and NBFCs before applying for a loan.
Mutual funds are a popular investment option and are often seen as a way to generate wealth. Additionally, it also provides the extra benefit of being collateral in times of need. A loan against a mutual fund can not only help you avail financial aid in times of need but also giving you long-term returns on your mutual funds
BILLIONBRAINS GARAGE VENTURES LIMITED
Vaishnavi Tech Park, South Tower,
3rd Floor, Survey No.16/1 and 17/2,
Ambalipura Village, Varthur Hobli,
Bellandur, Bangalore, Bangalore South,
Karnataka, India, 560103
CIN: U72900KA2018PLC109343
