Essential Facts About Borrowing Money Using Mutual Funds
Loans Against Mutual Funds: A Secured Borrowing Option
In today's fast-paced world, having access to emergency funds can be crucial. One such option that has gained popularity is taking a loan against your mutual fund holdings. Here's a breakdown of this financial tool and its key features.
Loan Amount Limit
Typically, lenders offer loans up to 60–70% of the Net Asset Value (NAV) for equity mutual funds and 80–85% for debt mutual funds. The loan amount depends on the NAV of your pledged units.
Banks and Lenders Offering Such Loans
Numerous banks and lending platforms provide loans against mutual funds. HDFC, ICICI, SBI, and Axis Bank are among the banks offering such loans, while services like smallcase facilitate online loans against mutual funds. Wealth management firms like Ameriprise and investment firms like Edward Jones also offer securities-based lending or margin loans against investment portfolios, though often geared towards larger minimum amounts.
Interest Rates Compared to Other Loans
Interest rates on loans against mutual funds generally range from 8% to 12% per annum, which is lower than typical personal loans and credit card loans since these are secured loans backed by your mutual fund holdings.
Continuation of Returns on Pledged Units
An important aspect of loans against mutual funds is that your units continue to remain invested and generate returns. You cannot sell the pledged units until the loan is fully repaid and unpledged.
Additional Details
Most lenders prefer you to have your mutual fund units in demat form for the pledge process. Repayment options can be flexible, including EMIs or rolling overdraft facilities where you pay interest only on funds used. Loan disbursements are often quick, sometimes within hours after approval and completion of KYC formalities.
Other Considerations
Loans against mutual funds are useful for accessing emergency funds without disturbing long-term investment goals. However, it's essential to remember that loans against mutual funds may have higher interest rates than loans against gold or fixed deposits. Not all banks lend money against all mutual fund schemes, so it's crucial to check with your bank or lending platform before applying.
Axis Bank provides a loan of up to 85% of the value of debt mutual fund schemes and 60% of the value of equity mutual fund schemes. Loans against mutual funds from NBFCs like Aditya Birla Finance have higher minimum and maximum limits compared to banks, with Aditya Birla Finance offering a minimum of Rs 25 lakh and a maximum of Rs 10 crore.
When considering a loan, it's important to evaluate all available options to make an informed decision. There is an upper limit on the loan amount you can get, with most banks setting the maximum at Rs. 20 lakh for equity mutual funds and up to Rs. 1 crore for debt mutual funds.
In summary, a loan against mutual funds offers a cost-effective, secured borrowing option with relatively lower interest rates, a loan amount tied to fund value, continued investment returns during the loan period, and is offered by various banks and financial institutions with flexible repayment and disbursement options.
Investing in personal-finance strategies may involve exploring options beyond traditional methods, such as taking a loan against your mutual fund holdings for emergency funds. Fixed deposit interest rates can be higher than loans against mutual funds, making the latter a more attractive option for some investors.
