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Loans Against Mutual Funds: All You Need to Know

By Chanel Rick - Jun 10,2022
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Loan Against Mutual Funds

The ever-booming investment sphere has taken over our favourite social media platforms and streaming websites. Their question remains the same, have you begun investing yet? Old excuses like not knowing much about investing strategies are no longer applicable! With investment simulators and user-friendly robo-advisories, anyone can start investing today.  

That said, what do these investment opportunities offer you? Of course, mutual funds are a great way to allow your idle savings to earn money through diverse funds. However, that’s not all! When the sudden need for additional monetary resources arises, mutual funds have your back!  

The Rundown: Loans Against Mutual Funds 

Since mutual funds act as collateral, this type of loan is secure and easy to avail, unlike other loan options. Simply put, it’s a loan against your securities. So, you can quickly access these sanctioned funds without redeeming or selling your mutual fund investments. The final sum depends on the value of units in your portfolio.  

Until the loan is repaid, you can’t redeem any pledged units. That said, your existing SIPs will continue uninterrupted. Fortunately, you can easily apply for this type of loan by approaching offline or online avenues. Most digitally-advanced banks like HDFC and ICICI offer online options with minimal paperwork.   

It’s a viable option for those seeking additional funds with many benefits! Here are some advantages of opting for loans against your mutual funds.  

  • Quick Disbursal: Opt for simple online processes for faster disbursal of the requested amount by submitting fewer documents or dealing with minimal pre-requisites
  • Lower Interest Rates: This is a secured type of loan since the mutual fund investments acts as collateral
  • Stable Portfolio: Zero disruptions that dwindle your portfolio by unnecessarily redeeming or selling mutual funds for extra resources
  • Solves Short-Term Crunches: Quickly resolve your short-term monetary needs with this loan without losing ownership of your mutual funds
  • Use & Pay: Pay interest only for the amount used, not the entire loan amount sanctioned

Applying for loans against mutual funds could provide you with various benefits. The dual benefits are – multiplied savings and hassle-free loans! For any investor, this could prove to be a valuable resource.   

4 Things You Need to Know  

Loans against mutual funds are an amicable solution for your short-term monetary requirements, but other factors are at play here. Before applying for that loan, here are four things everyone should know.   

1. Loan Amount is Subjective  

This type of loan can only sanction an amount equal to the value of mutual funds you own or plan to pledge. So, depending on the financial institute borrowed from and the mutual fund scheme, your loan amount is determined.  

Tip: Those without a credit history can easily apply for this loan and immediately avail of substantial credit.  

2. Upper Limit on Sanctioned Amount  

Much like other types of loans, this option comes with certain restrictions. Most banks have set a minimum and maximum loan amount you can receive against mutual funds. However, NBFCs are likely to approve higher loan amounts for both limits.   

3. Not Available for all Banks  

While seemingly inconvenient, some banks only offer this loan option for particular mutual fund schemes. Both HDFC and ICICI offer loans on funds managed by asset management companies registered with Computer Age Management Solutions Private Limited (CAMS). Though, banks like SBI only provide this loan against mutual fund schemes of SBI Mutual Funds.  

Tip: During the loan tenure, pay off the loan at your convenience – no need to follow an EMI system!   

4. Comparatively Cheaper than Others  

Unlike personal loans or credit card loans, using your mutual funds as collateral can secure you significantly lower interest rates. Depending on the type of mutual fund schemes owned, you can avail of higher or lower rates. Units of debt fund schemes receive lower rates than equity fund units.   

With a loan against mutual funds, you can solve the problem extra cash flow. Make sure to opt for banks with offers compatible with the type of mutual fund units you want to pledge.

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