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Tata Capital > Blog > Loan on Securities > Loan against mutual funds: Everything you need to know

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Loan against mutual funds: Everything you need to know

Summary
A Loan Against Mutual Funds (LAMF) is a secured loan wherein you can borrow money using your mutual fund units as collateral. Lenders provide cash to help you fulfill short-term needs while you retain ownership of your investments. A temporary lien is placed on your mutual fund units, but they continue to grow and let you earn returns. The loan against mutual funds interest rate is lower than credit card borrowing or standard personal loans.

A loan against mutual funds makes it easier for you to secure funds by pledging your mutual fund units as security without selling them.

Investing in mutual funds is a smart idea. But what if we told you your mutual funds could work twice as hard and help you meet financial needs like high-value purchases, medical bills, etc.? That, too, without forcing you to sell your mutual funds.

You read that right. You can, in fact, borrow funds by pledging your mutual fund units as collateral without having to liquidate your investments. This loan facility provides you instant access to funds while allowing your investments to continue generating returns.

This article explores the features, benefits, eligibility criteria, and process of availing a loan against mutual funds.

What is a loan against mutual funds? How does it work?

A Loan Against Mutual Funds (LAMF) lets you borrow money by pledging your mutual fund units as security. You continue to be the owner of the investments while using their value to access funds.

Here’s a quick comparison of how loans against mutual funds differ from other types of loans.

  • Loan against mutual funds: Secured by mutual fund units, usually with lower interest rates.
  • Personal loan: Unsecured, so interest rates may be higher.
  • Loan against property: Secured by property and generally offers a larger loan amount.

A loan against mutual funds can be useful when you need funds without selling your mutual fund investments.

What are the key features of a loan against mutual funds?

Some key features of a loan against mutual funds are:

  1. Lien marking facility: The investor has to contact the mutual fund house and request for a lien to be marked on the mutual fund units in favor of the lender providing the loan. This lien transfer request has to be signed by all the unit holders.
  2. Instant loan processing: Once all documentation is completed, the loan processing is done instantly, and funds are disbursed into the investor’s account. This makes it an ideal option to meet urgent financial needs.
  3. Eligibility of both debt and equity funds: Units of both debt and equity mutual funds are accepted by lenders as collateral for availing a loan against mutual funds.
  4. Loans for first-time borrowers: These loans are extended even to first-time borrowers who may not have any credit history.
  5. Loan amount: The maximum loan amount provided depends on the type and value of mutual fund schemes pledged. This limit varies from one lender to another.

What are the benefits of a loan against mutual funds?

Here are the benefits of loans against mutual funds:

  1. Instant and convenient access to funds: One of the biggest advantages is the quick and convenient access to funds through online processing. The loan can be availed instantly by pledging mutual fund units and setting an overdraft limit. This is a hybrid term loan. This saves time compared to traditional loan processing.
  2. Flexible interest payment: The interest on the loan has to be serviced monthly by crediting the loan account. However, interest is charged only on the utilized loan amount rather than the entire sanctioned amount. This makes the interest cost flexible.
  3. Faster availability compared to other loans: The funds from a loan against mutual funds can be credited within a day compared to the longer waiting periods for other loans. This makes it ideal for urgent needs.
  4. Lower interest rate: The loan against mutual funds interest rate is lower than interest rates on other loan options like personal loans and credit card loans. This results in lower EMIs and greater affordability.
  5. No liquidation of funds required: One of the biggest benefits of a loan on mutual funds is that the investor can avail of a loan without having to liquidate or redeem their mutual fund investments. The units remain in the investor’s demat account.

The below-mentioned eligibility, document requirements, and application process may change from vendor to vendor and from time to time.

What are the loan against mutual funds interest rates?

Before applying for mutual fund loans, it is crucial to know interest rates.  Typically, loan against mutual fund interest rates will vary widely across different public sector banks, private banks, NBFCs, and other lending institutions based on several factors.

  • Lender’s policies: Each lender sets its own rates. For example, a bank may offer a lower rate than an NBFC.
  • Type of mutual fund: Equity, debt, and other fund types may attract different rates based on their risk and liquidity.
  • Borrower’s profile: A strong credit history and stable income may help you get a competitive loan against MF interest rate.
  • Loan amount and tenure: The amount borrowed and repayment period can also influence the rate.

Make sure you compare lenders and check their current rates before applying.

What are the eligibility criteria for loan against mutual funds?

The type of investors eligible for a loan against mutual funds is as follows:

  • Resident individuals: Indian residents aged 18 years or above can apply if they hold eligible mutual fund units.
  • NRIs: NRIs can also apply if they have mutual fund investments permitted under applicable rules.
  • Businesses and entities: Partnership firms, private trusts, and private and public limited companies holding eligible mutual funds may apply.
  • Profession: Salaried individuals, self-employed professionals, and business owners can generally apply. The nature of employment or business may not restrict eligibility.

The  loan against mutual funds eligibility criteria you must fulfill to secure the loan include:

  • Mutual fund value: Lenders may require a minimum eligible mutual fund value, often around Rs. 50,000 or more, depending on their policy.
  • Credit profile: The lender may assess your credit history, existing liabilities, and repayment capacity before approving the loan.
  • Eligible securities: Only mutual fund schemes approved by the lender can usually be pledged. Equity and debt funds may have different Loan-to-Value (LTV) limits.

What are the required documents for a loan on mutual funds?

The following documents are required by lenders to avail a loan against mutual funds:

  1. PAN Card
  2. Proof of identity (Aadhaar card/Passport/Driving License/Voter ID)
  3. Proof of address (Aadhaar card/Passport/Driving License/Voter ID)
  4. Signature verification (PAN card/Passport/Banker’s verification)

Many lenders offer paperless KYC through Aadhaar-based e-KYC, OTP verification, video KYC, and digital document uploads. This can make the application and verification process faster.

Which mutual funds are eligible for a loan?

Loan against mutual funds eligibility depends on the lender and the mutual fund scheme you are pledging. Generally, lenders accept units held with recognized and lender-approved Asset Management Companies (AMCs). Many institutions accept funds serviced through CAMS and KFintech. However, some may restrict loans to units registered through specific platforms.

Furthermore, you must know that lenders exclude certain schemes. For example, you cannot pledge Equity-Linked Savings Scheme (ELSS) units during their lock-in period. Similarly, you can pledge SIP investments only if the accumulated units meet the lender’s requirements.

You must check the lender’s current loan against mutual funds eligibility criteria online or at a branch before applying.

What is the loan against mutual funds application process (Online & offline)?

The process of applying for a loan against mutual funds is straightforward:

  1. If the mutual fund units are held in physical/statement form, they need to first be dematerialized into electronic/demat form to pledge them for the loan.
  2. Investors can apply online for a loan against mutual funds through the lender’s online facility after logging into their account. The online application process and paperless approval make availing of a loan against mutual funds quick and convenient for investors.
  3. The lender will verify the investor’s details, mutual fund portfolio, and eligibility.
  4. After the application is approved by the lender, the loan processing will commence.
  5. The lender will request the mutual fund registrar to mark a lien on the specific units that are being pledged against the loan.
  6. The registrar sends a lien confirmation letter to the investor with a copy marked to the lender, mentioning the units against which the lien has been created.
  7. After completion of all documentation and lien marking, the loan amount sanctioned gets credited to the investor’s account.

How does a loan against mutual funds differ from other loan types?

A loan against mutual funds is different from other loan types on various parameters.

FeatureLoan against mutual fundsPersonal loanLoan against propertyGold loan
SecurityMutual fund unitsUnsecuredPropertyGold
Interest rateGenerally lower than personal loansGenerally higherUsually lowerModerate
Loan amountBased on MF value and LTVBased on borrower’s income and credit profileBased on property valueBased on gold value
ProcessingUsually quickQuickComparatively slowerUsually quick
Asset ownershipYou retain MF ownershipNo asset pledgedProperty remains yoursGold is pledged

What are the risks and disadvantages of a loan against mutual funds?

A loan against mutual funds can provide quick funds without requiring you to sell your investments. But there are also some disadvantages:

  • Market risk: A fall in the mutual fund value can reduce your available loan limit.
  • Margin calls: The lender may ask you to repay part of the loan or provide additional security if the value falls sharply.
  • Interest cost: Your overall borrowing cost can increase if you do not repay the loan on time.
  • Loss of investments: If you fail to repay, the lender may sell the pledged mutual fund units.
  • Limited fund choices: Not all mutual fund schemes may be accepted, such as ELSS.

What are the tax implications of a loan against mutual funds?

A loan against mutual funds is generally not treated as taxable income because you are borrowing money instead of earning it. However, you may have to pay taxes if the lender sells your pledged mutual fund units to recover unpaid dues. Such a sale can result in capital gains tax. The amount will depend on the fund type, holding period, and gains made. Also, interest paid on the loan is generally not eligible for a personal tax deduction unless the borrowed funds are used for a qualifying income-generating purpose.

Conclusion

There are countless benefits of loans against mutual funds, including short-term liquidity, without having to sell your investments. It is important to note that you must repay your mutual fund loan in full to regain complete control over your MF units.

However, once the amount is repaid, you can continue to hold or redeem them without additional charges. Loans against MFs are best suited for your urgent financial needs and cash-flow gaps. For further guidance on mutual fund loans, visit Tata Capital’s website today!

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Disclaimer:

Loans are at the sole discretion of Tata Capital Limited (TCL). T&C apply.

Tata Capital Limited does not offer loans against insurance policies. Any person or entity claiming to do so on behalf of Tata Capital Limited is unauthorised. Tata Capital Limited does not accept shares of Tata Group companies as eligible collateral. Pledge requests initiated for such securities will be rejected.

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FAQs

What interest rate can I expect for loan against mutual funds in India?

 

Loan against mutual funds interest rates vary based on the lender, their policies, the mutual fund type, and the borrower’s profile. Generally, interest rates range between 8% to 20% per annum.

Can I apply for a mutual fund loan completely online?

 

Yes, many public sector banks, private banks, and NBFCs allow you to fully apply for loans against mutual funds online. 

Is loan against mutual funds better than personal loan for emergencies?

 

Generally, loans against mutual funds are considered beneficial for urgent fund requirements and short-term cash flow. Once the amount is repaid, you can regain full control of your mutual funds.

What happens to my mutual fund units after taking a loan against them?

 

When you take a loan against MF, the fund gets pledged as collateral or security. You cannot redeem the funds or switch units until the entire loan amount has been repaid.

Are there prepayment or foreclosure charges on mutual fund loans?

 

Prepayment and foreclosure charges on loans against mutual funds will vary based on the lender and their individual policies. It is essential to check with your lender regarding other fees and penalties.

What is the minimum CIBIL score for loan against MF eligibility?

 

Usually, the required CIBIL score for secured loans varies by lender. Most require borrowers to have a score of or above 650 for smoother approval.

Can fixed-term/ELSS mutual funds be used for a loan against MF?

 

Yes, many lenders offer options for loans against ELSS mutual funds. However, different financial institutions will have varying policies regarding the same.

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