Taking a loan against mutual funds can offer financial flexibility and liquidity, leveraging one’s investments for immediate needs. 

However, borrowers must consider several crucial parameters and risks before opting for this option. Understanding the loan details, loan tenure, Loan to value (LTV), costs involved, repayment flexibility, approved mutual funds and the impact of market fluctuations is essential. 

Moreover, borrowers must be aware of the application process and other associated tasks. While secured against assets, risks include potential liquidation of securities by lenders and fluctuations in asset value affecting loan eligibility. Careful consideration of these factors is vital for informed decision-making in borrowing against mutual funds.

1. Eligibility and Loan Amount

You can obtain a loan against your mutual fund holdings if you are the sole or joint holder of the units and have completed the minimum lock-in period. The loan amount depends on the type of mutual fund scheme and the financial institution from which you borrow.

For example, banks like HDFC and ICICI offer loans up to 50% of the Net Asset Value (NAV) for equity mutual funds and up to 80% for debt mutual funds. Axis Bank provides loans up to 85% of the value of debt mutual fund schemes and 60% for equity mutual funds.

2. Selective Lending

Not all banks extend loans against all mutual funds. Many banks have a predefined list of eligible mutual fund schemes.

For instance, SBI lends only against SBI Mutual Fund schemes, while HDFC Bank and ICICI Bank offer loans on schemes managed by asset management companies registered with Computer Age Management Solutions Private Limited (CAMS).

3. Loan Limits

Like any other loan, there are upper and lower limits for loans against mutual funds. ICICI Bank, for instance, sets the minimum loan amount at Rs. 50,000 and the maximum at Rs. 20 lakh for equity mutual funds. For debt mutual funds, the maximum limit can go up to Rs. 1 crore.

NBFCs (Non-Banking Financial Companies) often have higher limits. Aditya Birla Finance, for instance, offers a minimum loan amount of Rs. 25 lakh and a maximum of Rs. 10 Crore.

4. Cost Advantage

Loans against mutual funds are more cost-effective than personal loans or credit card loans. The interest rates are generally lower, making them an attractive option for short-term liquidity needs.

However, keep in mind that these loans are secured by your mutual fund units, so examine the risks before taking them.

5. Repayment and Returns

You can repay the loan through EMIs over a fixed tenure (usually 12 to 36 months). During the repayment period, your mutual fund investments continue to earn returns and dividends.

Another critical factor is understanding repayment conditions. Flexible repayment structures lessen the strain; for example, with a loan against mutual funds, you can repay the principal amount at any moment during the loan term. The borrower only needs to pay the interest once a month. This provides borrowers with a lot of flexibility This offers when their income streams are irregular.

Conclusion

Loans against mutual funds offer flexibility and cost advantages, making them an appealing option for short-term financial needs. However, borrowers must carefully consider eligibility criteria, loan limits and associated risks before proceeding. Consulting with a financial planner can help ensure informed decision-making and alignment with long-term financial goals.

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Disclaimer: The above content is for informational purposes only. Please consult a SEBI-registered investment advisor before investing in any scheme.