In today’s dynamic financial landscape, individuals often seek quick and reliable borrowing options to meet their urgent monetary needs. Among various lending products available, a loan against mutual funds has emerged as a highly viable and attractive solution for many investors. This facility allows you to unlock liquidity without selling your mutual fund units, preserving your long-term investment goals while addressing short-term cash requirements.
This article explores why a loan against mutual funds is the smarter borrowing option for investors in India. We will discuss its benefits, loan against mutual funds interest rate trends, eligibility criteria, and comparison with other secured and unsecured loans. By the end, you will understand why leveraging your mutual fund portfolio is a prudent financial choice.
Understanding loan against mutual funds
A loan against mutual funds is a secured loan where the mutual fund units you hold are pledged as collateral with the lending institution. These units serve as security, reducing the lender’s risk and often resulting in favourable loan terms such as lower interest rates and quicker approvals.
Unlike selling your mutual fund units, taking a loan against mutual funds allows you to retain ownership. This means you can continue accruing dividends, capital gains, and stay invested in the markets without interruption. The loan amount sanctioned is generally a percentage of the market value of your mutual fund holdings.
Advantages of loan against mutual funds
Quick access to funds
One of the most appealing features of a loan against mutual funds is the speed at which funds can be availed. Since mutual fund units are held dematerialised and can be quickly pledged electronically, lending institutions process these loans swiftly. This makes it a convenient option during emergencies or urgent financial requirements.
Lower interest rates compared to unsecured loans
Typically, the loan against mutual funds interest rate is significantly lower than that charged on unsecured personal loans or credit cards. This is because the loan is backed by collateral, making it less risky for lenders. Indian banks and NBFCs often offer interest rates ranging from 9% to 14% per annum on such loans, whereas unsecured loans may have rates as high as 20% or more.
No impact on investment portfolio
By choosing a loan against mutual funds, investors avoid the need to liquidate their units, helping them maintain their investment strategy intact. Selling units, especially during market downturns, can result in capital losses. With this loan facility, you can comply with your financial obligations without disturbing your wealth accumulation plans.
Flexible loan tenure and repayment options
Lenders provide flexible repayment terms on loans against mutual funds. Borrowers can opt for short-term or medium-term tenures, often ranging from a few months to a couple of years. Additionally, repayment can be structured as equated monthly instalments (EMIs) or bullet payments at tenure end, depending on the borrower’s preference.
Minimal documentation and eligibility criteria
Since the loan is secured, documentation requirements are minimal compared to unsecured loans. Eligibility is primarily based on the value of mutual fund units held and the investor’s identity verification. There is no income proof or credit history scrutiny required in many cases, making it accessible to a wide range of borrowers.
How loan against mutual funds interest rate is determined
The loan against mutual funds interest rate can vary based on several factors, including:
– Type of mutual fund pledged: Debt mutual funds, being less volatile, may attract lower interest rates compared to equity funds.
– Loan-to-value (LTV) ratio: Higher the LTV ratio (loan amount as a percentage of mutual fund value), the higher could be the interest cost.
– Borrower profile: Creditworthiness and relationship with the lender also influence the interest rate.
– Market conditions: Prevailing monetary rates and RBI policies impact lending rates.
For example, many lenders in India offer an LTV of up to 75% on debt funds and 60% on equity funds. The interest rates generally fluctuate between Rs. 9% to Rs.14%, which is attractive compared to unsecured credit avenues.
Eligibility and application process for loan against mutual funds in India
Eligibility criteria
– The applicant must be a resident Indian individual.
– Mutual fund units must be in the investor’s demat account and clearly identified.
– Minimum holding period and value thresholds may apply.
– Age requirements may differ between lenders.
– Some lenders need the funds to be from specific recognised mutual fund houses.
Application process
– Submit an application either online or at the lender’s branch.
– Provide details of mutual fund holdings along with KYC documents.
– The lender evaluates the valuation and sanction amount based on current NAV.
– Upon approval, the loan amount is credited within 24-48 hours.
– Units are pledged electronically and continue to earn market returns.
Comparing loan against mutual funds with other borrowing options
Vs personal loans
Personal loans are unsecured and demand higher interest rates often above 18%-24%. They also involve intensive documentation and credit checks. Loan against mutual funds is more economical and faster to procure due to the lesser risk to lenders.
Vs loan against property
Loans against property generally offer larger sums but come with lengthy paperwork, valuation processes and rigid repayment schedules. Loan against mutual funds is suitable for smaller to medium-sized needs with greater flexibility and speed.
Vs credit card cash advances
Credit card cash advances carry exorbitant interest rates. Loan against mutual funds interest rate is far more reasonable and cost-effective.
Important considerations before opting for a loan against mutual funds
While this loan product offers many advantages, borrowers should keep the following in mind:
– The value of mutual fund units fluctuates with market movements, which may affect the loan eligibility over time.
– Defaulting on repayment may lead to forfeiture of pledged mutual fund units.
– The loan disbursement amount is subject to certain limits set by the lending institution.
– Always compare interest rates, processing fees, and other charges before selecting a lender.
Conclusion
A loan against mutual funds emerges as a smarter borrowing option for Indian investors who want to access liquidity without disrupting their investment portfolios. This facility offers lower loan against mutual funds interest rate compared to unsecured credit, faster processing, flexible tenure, and minimal documentation. By leveraging your mutual fund holdings, you can meet short-term cash needs swiftly while continuing to benefit from the capital appreciation and dividends of your investments. For those seeking a balanced approach to borrowing with cost efficiency and convenience, taking a loan against mutual funds is indeed a prudent financial strategy worth considering.
