Life is unpredictable, and you can experience a money crunch once in a while for various reasons. For example, it could be due to a vacation, a wedding in a family, or a medical emergency. In situations where you are short of cash, the first thing that we tend to think about is to use your savings and liquidate your investments even at a loss. And if that is not enough, you look for a loan. When you are taking a loan, instead of selling your mutual fund investments, you can get a loan against your mutual fund holdings from banks and non-banking financial companies (NBFCs). Here are certain things to know about loans against mutual funds. 

The Loan Amount Is Restricted Up To A Limit Of Your Mutual Fund Holdings

The quantum of loan you can get against your mutual fund is based on the type of mutual fund scheme you have invested in and the financial institution from which you will borrow. For example, banks like HDFC and ICICI give you a loan up to 50% of the net asset value (NAV) for equity mutual funds and up to 80% for debt mutual funds. Axis bank provides a loan up to 85% of the value of your debt mutual fund schemes and 60% of the value of your equity mutual fund scheme. 

Not There For All Banks

Some banks only offer this loan for specific mutual fund schemes. Both HDFC and ICICI offer loans on mutual funds managed by asset management companies registered with Computer Age Management Solutions Private Limited (CAMS). Banks like SBI only provide this loan against mutual fund schemes for SBI mutual funds. 

Upper Limit on Sanctioned Amount 

Like many other types of loans, there are certain limits in loans against mutual funds as well. Several banks have a maximum and minimum limit on the quantum of loan you can get. For instance, most private banks like ICICI bank have set the minimum loan at Rs. 50,000 and the maximum amount at Rs. 20 Lakhs in case of equity mutual funds and up to Rs. 1 crore in case of debt mutual funds. When it comes to NBFCs, both the minimum and maximum limits are usually higher. For instance, the minimum loan amount at Aditya Birla Finance is up to Rs. 25 Lakhs and the maximum is Rs. 10 crores. 

Comparatively Cheaper than Others  

Getting a loan against mutual funds can help you obtain lower interest rates whereas it may not be possible for personal loans or credit card loans all the time. Depending on the type of mutual fund schemes owned, you can procure higher or lower interest rates. Debt fund scheme units receive lower rates than equity fund units. With a loan against mutual funds, you can tackle any financial crunch. Ensure to choose banks with offers compatible with the type of mutual fund units you want to pledge.

You Will Continue To Earn Returns On Your Pledged Mutual Fund Units

When you take a loan against mutual funds, you will be pledging some units as security. The pledged units will stay invested in the market as security. This is because when you pledge your mutual fund units at a bank, the bank has the right to sell the mutual funds only in the case of default. As long as you do not default, your investments remain in the market and you will continue to earn returns on them. Thus, you make sure that your financial plan is still intact, and at the same time, you get to raise the much required amount quickly without redeeming any units. 

You Can Get An Overdraft Limit Set In Your Bank Account By Applying Online 

Due to the boom in digitization, many banks like SBI, HDFC, ICICI, etc. are now providing a loan against mutual fund holdings online. All you have to do is pledge your mutual fund units online and get an overdraft limit set in your account. Overdraft facility implies a credit agreement with your bank that enables you to take out more money  than what you have in your account. It has a pre-approved limit. If the overdraft limit is Rs. 2 Lakhs and you have kept Rs. 50,000 in your bank account, then you can withdraw up to Rs. 2.5 Lakhs from that account. For procuring this overdraft facility, the bank will charge you interest.

What Are The Benefits of Loan Against Mutual Funds? 

  • Loan against mutual funds is an excellent way to receive instant liquidity against the mutual funds you own. 
  • This is an excellent way to raise capital quickly for short term financial requirements. 
  • If you opt for a loan against mutual funds, then you would not have to sell your units. Hence your financial plan and fund ownership remain intact.
  • The interest rates for a loan against mutual funds can be lower than that for personal loans. 

Conclusion

A loan against mutual funds seems a better option because of the lower interest rate as compared to personal loans and loans against credit cards. However, the rate of interest on loans against mutual funds is usually higher than loans against gold or fixed deposits. So, analyze all the options before you take a loan. 

FAQS of Loan Against Mutual Funds

1:How do loans against mutual funds work? 

For a loan against mutual funds, you are offering your mutual fund units as collateral for the loan. The bank keeps the mutual fund units as security till you repay the loan amount. Your mutual funds will keep earning returns but they cannot be sold while you have pledged them to the bank.

2:Is it good to take out loans against mutual funds?

In loan against mutual funds, you will get a lower interest rate as compared to credit cards or personal loans. This is because a loan against mutual funds is a secured loan and is backed by collateral. So, with respect to interest rate,a loan against mutual funds is good. 

3:What is the criteria for granting loans against mutual funds?

You must keep the mutual fund units as security when you get a loan from the bank to acknowledge your loan request. Post applying for a loan, the lender will look at the quality of your holdings before granting the loan. However, make sure you verify the lender’s approved list of mutual funds against which you can get a loan.