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Facing an unexpected financial crunch? Instead of redeeming mutual fund investments, consider a smarter alternative called loan against mutual funds. It allows you to borrow money while keeping your investments intact, helping you meet urgent needs without affecting your long-term wealth creation plans. So, you can access quick funds without disturbing long-term financial goals.
Discover how it works, along with its key features and benefits, to make better financial choices.
Key Takeaways
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A loan against mutual funds enables you to borrow money by pledging your mutual fund units rather than selling them, which might help you meet immediate financial obligations.
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Lenders often approve 50-70% of the fund's value, and interest rates on loans against mutual funds are usually cheaper than those on unsecured credit.
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Your pledged units continue to generate returns during the loan duration, assisting with long-term wealth building.
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This option is appropriate for short-term cash requirements, but it involves risks such as margin calls if market prices decline.
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 lender attaches a lien on the pledged units, but they continue to generate returns during the loan period.
This falls within the broader category of loans against securities, which includes pledging stocks, ETFs, and bonds. The sanctioned amount is typically determined by the type of plan and its current market worth. Because it acts like an overdraft, interest is only levied on the amount withdrawn, providing flexibility for short-term financial requirements.
Features of Loan Against Mutual Funds
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Individual investors, NRIs, firms, HUFs, trusts, companies, and entities can avail of loans against mutual fund investments.
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You pledge your mutual fund units rather than redeeming them, allowing you to receive returns while borrowing.
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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.
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Interest is charged only on the amount you have actually used, not the entire sanctioned limit.
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Because it’s a secured borrowing, the loan against mutual funds interest rate tends to be lower than typical unsecured personal loans or credit cards.
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Typically, 50% of NAV for equity funds, and greater (up to 70-80% for debt funds).
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The average interest rate charged for a loan against mutual funds ranges from around 8% to 15%.
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The loan amount can range from a minimum of ₹25,000 to a maximum of ₹5 crore, depending on the bank or NBFC.
How Does a Loan Against Mutual Funds Work?
A loan against mutual funds enables investors to get funding without selling their holdings. To get started, you pledge your mutual fund units to a bank or NBFC as collateral. The lender determines the appropriate loan amount, which is typically 50-70% of the current value for equity funds and up to 80% for debt funds, and approves an overdraft or term loan accordingly.
Interest is only charged on the percentage of the loan that is used, allowing greater flexibility and cost savings than unsecured loans. During the loan time, your pledged units continue to generate returns and dividends, ensuring that your long-term investment grows.
Lenders also keep track of the pledged units' net asset value. If the fund's value falls sufficiently, the lender may make a margin call, seeking extra collateral or partial repayment to keep the loan-to-value ratio stable. After complete payments, the lien is lifted and the units are returned to the investor.
This technique meets short-term cash demands while keeping investments intact, making it an effective choice for managing unexpected costs or bridging temporary financial gaps.
Also, learn What are Debt Funds here.
Eligibility Criteria and Documents Required
Before applying for a loan against mutual funds, investors should meet certain eligibility criteria set by lenders, including:
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Age Requirement: Typically, applicants must be between 18 and 65 years old. Some banks and NBFCs may extend eligibility to those above the age of 65, depending on their regulations.
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Employment Status: Both salaried and self-employed individuals can apply, however approval depends upon the lender's unique requirements. Stable revenue sources increase the risk of securing the loan.
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Mutual Fund Holdings: The applicant must have mutual fund units in their name that may be pledged as security. This financing is open only to qualifying schemes, which are generally equity, debt, or hybrid funds.
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Required Documents: Commonly needed documents include identity evidence (PAN, Aadhaar), residence proof, and bank account information. Some lenders may also want income evidence, particularly for larger loan amounts.
Advantages of Loan Against Mutual Funds
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Advantages |
Description |
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No need to sell investments |
Investors can raise funds without liquidating their mutual funds, preserving long-term wealth creation. |
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Quick processing |
Loan approvals are usually faster than traditional loans, ideal for urgent financial needs. |
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Continued investment growth |
The pledged mutual fund units continue to earn returns, even during the loan period. |
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Lower interest rates |
These loans often have lower interest rates compared to unsecured options like personal loans or credit cards. |
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Overdraft flexibility |
Interest is charged only on the amount used, not the entire sanctioned amount, offering repayment flexibility. |
Disadvantages of Loan Against Mutual Funds
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Disadvantages |
Description |
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Market risk exposure |
If the mutual fund value falls, lenders may issue a margin call requiring repayment or more collateral. |
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Risk of liquidation |
Failure to meet margin calls or required payments can lead to forced sale of pledged units by the lender. |
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Limited loan amount |
Lenders usually sanction only 50–70% of the fund's current value, restricting access to the full investment value. |
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Interest and processing charges |
Even with lower interest rates, borrowers must account for fees and charges that can impact overall returns. |
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Tax implications of liquidation |
If pledged units are liquidated due to default, it may lead to capital gains tax liability. |
Risks and Limitations
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Loan amounts are limited by fund type and NAV, so you may not get the entire value of your investment.
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Market volatility can impact the value of pledged units, restricting the loan's flexibility.
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Borrowing costs, such as processing fees and interest, can diminish total investment returns if utilised for non-essential uses.
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Defaulting on payments may result in compulsory redemption of units, limiting future investment growth.
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Frequent dependence on this service may encourage short-term borrowing over long-term financial planning.
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Lenders may have different eligibility and paperwork requirements, complicating the application procedure.
Loan Against Mutual Funds vs Selling Investments
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Parameter |
Loan Against Mutual Funds |
Selling Investments |
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Impact on Investment |
Units stay invested |
Investment stops growing |
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Liquidity |
Quick access without sale |
Immediate liquidity |
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Cost Factor |
Interest + fees |
Possible exit load & taxes |
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Market Impact |
NAV fluctuations affect margin |
No margin calls |
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Suitability |
Short-term needs |
Long-term portfolio changes |
Conclusion
A loan against mutual funds is a practical method to obtain financing without having to redeem your assets, allowing you to keep your long-term goals intact. Evaluating the eligibility requirements and relevant documentation facilitates a seamless application process, especially when applying online through digital lending platforms. The facility provides significant benefits, including continuous investment growth, flexible withdrawals, and speedier approvals.
However, borrowers must consider risks and limits such as market-linked margin calls and the potential of liquidating pledged units. Comparing loans to mutual funds and selling investments illustrates when each option is appropriate. While this method is beneficial for obtaining immediate funds, it must be used appropriately. Investors should be aware of larger market activity, such as after-hours trading, in order to make more educated financial decisions.