Facing an unexpected financial crunch? Instead of redeeming mutual fund investments, consider a smarter alternative called loan against mutual funds. This option allows access to quick funds without disturbing long-term financial goals.
With this facility, you can handle urgent expenses while your investments continue to grow in value. Discover how it works along with its key features and benefits to make better financial choices.
What Are Loan Against Mutual Funds?
A loan against mutual funds is a financial facility where investors can borrow money by pledging their mutual fund units as security. Instead of selling their investments, investors can access funds based on a percentage of the current market value of those units.
The loan typically works like an overdraft, where interest is charged only on the amount used. Since the mutual fund units are pledged, the lender holds a lien on them, but investors still earn returns on their holdings.
This option helps manage short-term financial needs without disrupting long-term investment growth, and the lender can only sell the units if the borrower defaults.
Features of Loan Against Mutual Funds
- Individual investors, NRIs, firms, HUFs, trusts, companies, and entities can avail of loans against mutual fund investments.
- The loan amount you receive depends on the type of mutual fund (Equity/Debt/Hybrid) and the bank/NBFC from which you avail this facility.
- The average interest rate charged for a loan against mutual funds ranges from around 8% to 15%.
- The loan amount can range from a minimum of ₹25,000 to a maximum of ₹5 crore, depending on the bank or NBFC.
Advantages of Loan Against Mutual Funds
| Advantages | Description |
| No need to sell investments | Investors can raise funds without liquidating their mutual funds, preserving long-term wealth creation. |
| Quick processing | Loan approvals are usually faster than traditional loans, ideal for urgent financial needs. |
| Continued investment growth | The pledged mutual fund units continue to earn returns and dividends, even during the loan period. |
| Lower interest rates | These loans often have lower interest rates compared to unsecured options like personal loans or credit cards. |
| Overdraft flexibility | Interest is charged only on the amount used, not the entire sanctioned amount, offering repayment flexibility. |
Disadvantages of Loan Against Mutual Funds
| Disadvantages | Description |
| Market risk exposure | If mutual fund value falls, lenders may issue a margin call requiring repayment or more collateral. |
| Risk of liquidation | Failure to meet margin calls or EMIs can lead to forced sale of pledged units by the lender. |
| Limited loan amount | Lenders usually sanction only 50–70% of the fund’s current value, restricting access to full investment value. |
| Interest and processing charges | Even with lower interest rates, borrowers must account for fees and charges that can impact overall returns. |
| Tax implications on liquidation | If pledged units are liquidated due to default, it may lead to capital gains tax liability. |
Conclusion
While loans against mutual funds offer a practical solution for accessing funds without liquidating investments, they also come with risks, such as potential declines in the value of pledged units and margin calls.
Thus, borrowers should weigh the advantages and disadvantages carefully and conduct thorough research before opting for this financial facility to ensure it aligns with their long-term financial goals and risk tolerance.
FAQs
What is a loan against mutual funds?
It is a type of secured loan where you pledge your mutual fund units to borrow money without redeeming them. The lender gives you funds based on a certain percentage of your investment’s current value.
How does a loan against mutual funds work?
The loan usually works as an overdraft facility. You can withdraw funds as needed, and interest is charged only on the amount you use, not the entire sanctioned limit.
Can I still earn returns on my pledged mutual funds?
Yes, your investments continue to earn returns and dividends even while pledged, as you remain the owner of the units.
What types of mutual funds are eligible for the loan?
Both debt and equity mutual funds can be pledged. However, the loan amount and eligibility may vary depending on the type of fund and the lender’s policy.
Who can apply for a loan against mutual funds?
This facility is available to individual investors, NRIs, companies, HUFs, trusts, and other registered entities.
What are the risks involved for a loan against mutual funds?
If the market value of your mutual fund drops, the lender may ask for additional collateral or repayment. If you default, the pledged units may be sold by the lender.
