What is Loan Against Mutual Funds? Benefits and Eligibility

by Alina Khan

Published On July 4, 2024

In this article

Borrowing against investments has become a popular option for individuals seeking immediate liquidity without liquidating their assets. One such option is obtaining a loan against mutual funds, which allows investors to leverage their mutual fund investments to secure a loan while continuing to earn returns on the invested capital. This facility provides a tactical advantage for managing short-term cash flow needs or emergencies without disrupting long-term investment goals.

This article aims to explain what is loan against mutual funds, detailing the benefits it offers and the eligibility criteria required to avail such a loan. By using mutual fund units as collateral, investors can access funds quickly and often at lower interest rates compared to unsecured loans. Understanding how to strategically use this financial tool can empower investors to make informed decisions that balance immediate financial needs with future financial health.

What is Loan Against Mutual Funds?

A loan against mutual funds is a financial facility that enables investors to borrow funds by pledging their mutual fund investments as collateral. This type of loan is typically structured as an overdraft facility, allowing investors to draw upon the loan amount as needed, without having to liquidate their mutual fund holdings.

Key Features of Loan Against Mutual Funds:

  • Overdraft Facility: Unlike a traditional loan that disburses a lump sum, a loan against mutual funds grants you an overdraft facility. This means you can withdraw the amount you need up to the sanctioned limit and pay interest only on the amount utilized.

  • Interest Charges: The interest on a mutual fund loan is charged only on the portion of the loan that you actually use and for the time you use it. This makes it a cost-effective option for managing short-term liquidity needs.

  • Lien Marking: To avail of a loan against mutual funds, investors need to lien mark their mutual fund units in favor of the lending institution. This is done digitally and can be facilitated through major Registrars & Transfer Agents like CAMS and KFintech in India.

  • Flexibility: The facility offers the flexibility to repay the loan at any time without incurring prepayment penalties, which is beneficial for managing finances without long-term debt commitments.

  • Diverse Mutual Fund Options: Most banks and financial institutions allow loans against a variety of mutual funds managed by different Asset Management Companies (AMCs). This provides flexibility in terms of the mutual fund schemes that can be pledged to secure a loan.

Ideal Usage:

This facility is best used for meeting short to medium-term financial needs without disrupting your investment strategy. Whether it’s for handling an emergency, financing a big-ticket purchase, or bridging short-term cash flow gaps, a loan against mutual funds ensures that your long-term investments remain intact and continue to grow.

A loan against mutual funds offers a pragmatic solution for investors looking to leverage their existing mutual fund investments to meet immediate financial needs without selling their assets. It combines the benefits of easy access to funds, cost efficiency, and maintaining investment growth, making it a smart financing option under the right circumstances.

How Does a Loan Against Mutual Funds Work?

Obtaining a loan against mutual funds is a strategic way for investors to manage financial needs without liquidating their investment assets. This type of mutual fund loan provides a flexible, cost-effective solution for accessing funds while allowing your investments to continue to appreciate. Here's a step-by-step breakdown of how this process typically works:

Step 1: Eligibility and Fund Selection

  • Check Eligibility: First, ensure that your mutual fund holdings qualify for such loans. Most banks and financial institutions have a list of approved mutual funds from various Asset Management Companies (AMCs) that are eligible for loans.

  • Selection of Funds: Choose the mutual funds you want to pledge as collateral. It's important to select funds that are not only eligible but also sufficient to cover the loan amount you need.

Step 2: Lien Marking

  • Initiating Lien: Once you have selected the mutual funds, you need to lien mark the units equivalent to the amount of the loan. Lien marking is a legal claim on the mutual fund units in favor of the lender, which serves as security for the loan.

  • Digital Process: The process of lien marking can typically be completed online through the mutual fund's registrar and transfer agent, such as CAMS or KFintech, ensuring a smooth and hassle-free experience.

Step 3: Loan Disbursement

  • Overdraft Facility: After the lien is successfully placed on your mutual funds, the lender will set up an overdraft facility in your name. This facility allows you to withdraw funds up to the sanctioned loan amount.

  • Flexible Withdrawal: You can draw funds as needed from this overdraft account. This flexibility is particularly useful for managing fluctuating financial requirements without the need to liquidate your investments.

Step 4: Interest Payment

  • Interest Charges: Interest is charged only on the amount you utilize from the overdraft facility and not on the entire sanctioned loan amount. This can significantly reduce the cost of borrowing.

  • Repayment Flexibility: You have the flexibility to repay the borrowed amount at your convenience. The repayment does not necessarily follow a fixed EMI structure, and you can deposit funds back into the overdraft account at any time to reduce the interest burden.

Step 5: Closure of Loan

  • Releasing Lien: Once you have repaid the loan amount in full, the lien on your mutual funds is lifted, and full ownership of the mutual fund units reverts to you.

  • No Prepayment Penalty: Most loans against mutual funds do not have prepayment penalties, which means you can repay the loan ahead of schedule without incurring extra costs.

A loan against mutual funds is designed to provide liquidity while keeping your long-term investment goals intact. By leveraging your mutual fund investments as collateral for loans, you gain access to necessary funds without disrupting the growth potential of your investments. Understanding how this type of mutual fund loan works can help you make informed decisions about financing options and manage your financial portfolio more effectively.

Benefits of Taking a Loan Against Mutual Funds

Opting for a loan against mutual funds presents a host of advantages that can cater to both immediate financial needs and long-term investment goals. This financing option, often referred to simply as a mutual fund loan, combines accessibility, cost-effectiveness, and flexibility, making it an attractive choice for many investors. Here are some significant benefits:

Quick Access to Funds

  • Instant Limit Approval: With platforms like the MAFS mobile app, you can apply and get an overdraft limit against your mutual funds within minutes. The entire process is digitized, making it fast and user-friendly.

  • Instant Disbursal: Once approved, the required amount can be credited directly to your bank account on the same day, ensuring that you have timely access to funds whenever you need them.

Flexible and Cost-Effective Financing

  • Attractive Interest Rates: Loans against mutual funds generally offer lower interest rates compared to personal loans, with rates starting at around 9.5% per annum on the utilized amount. This makes it a cost-effective option for borrowers.

  • Interest on Utilized Amount Only: Unlike traditional loans, where interest is charged on the total loan amount, interest on loans against mutual funds is levied only on the amount you use and for the duration it is used.

No Prepayment Penalties

  • Zero Foreclosure Charges: There are no charges for repaying your loan early. This feature allows you to clear your debt whenever you have surplus funds without incurring extra costs.

High Loan Value

  • Higher Loan Limits: Depending on the type of mutual funds you pledge (equity or debt), you can get a high loan amount, with limits up to Rs 1 Crore for equity funds and up to Rs 3 Crore for debt funds.

Retain Investment Benefits

  • Continued Ownership: Even as you borrow against them, you continue to own your mutual fund units. This means you continue to benefit from potential appreciation and dividends, thus not disrupting your long-term investment strategies.

100% Digital Process

  • Paperless and Hassle-Free: The entire process, from application to disbursement, can be completed online via mobile apps like MAFS, eliminating the need to visit bank branches or handle physical paperwork.

Large Selection of Securities

  • Wide Range of Eligible Funds: You can choose from a broad array of mutual funds approved by different asset management companies. This diversity allows you to use the funds that best meet your financial strategy as collateral.

Flexible Repayment Options

  • Manageable Repayment Terms: The loan typically comes with a 12-month tenure and is renewable. You are required to service only the interest accrued monthly, based on how much of the overdraft you have utilized, adding to the flexibility of managing your finances.

Eligibility Criteria for Mutual Fund Loan

When considering a loan against mutual funds, it's crucial to understand the eligibility criteria set by financial institutions. This ensures that you meet the necessary requirements to avail of a mutual fund loan. Here’s a breakdown of the typical eligibility requirements you need to fulfill:

Basic Eligibility Requirements

  • Residency: You must be a resident Indian individual, ensuring that you are eligible to make financial transactions within the country.

  • Age Limits: Applicants should be between 18 to 75 years of age. This range allows both young investors and senior citizens to access funds against their mutual fund investments.

Documentation and Registration

  • Valid Identification: You should have a valid Permanent Account Number (PAN) and Aadhaar Card. These documents are crucial for KYC (Know Your Customer) procedures and to comply with Indian financial regulations.

  • Bank Account Details: A valid bank account number along with a cheque copy for the account to be linked is required. This account will be used for crediting the loan amount and debiting repayments.

Mutual Fund Specifics

  • Approved Mutual Funds: The mutual funds should be approved as per the policy of the lending institution. Financial services like MAFS accept mutual funds registered with CAMS and Kfintech, which are major Registrars & Transfer Agents (RTAs) in India.

  • Ownership of Mutual Funds: You must be the owner of the mutual fund units you intend to pledge. This ensures that the securities are legally available for lien marking.

Digital Proficiency and Communication

  • Digital Process: The loan application and management process is entirely digital, so you should be comfortable using mobile applications or online banking platforms. This digital proficiency is necessary for applying for a limit, withdrawing funds, and repaying the used amount.

  • Contact Information: A valid email ID and mobile number are essential for receiving updates and communication regarding your loan status and for ongoing management of your account.

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How to Apply for Loan on Mutual Fund

Applying for a loan against mutual funds is a straightforward process, thanks to the digital advancements in the banking and financial services industry. Whether you need funds for emergency expenses or to manage cash flow gaps, understanding how to apply for a mutual fund loan can provide you with quick access to needed funds without liquidating your investments. Here’s a step-by-step guide on how to apply:

Step 1: Check Your Eligibility

  • Review Eligibility Criteria: Before proceeding, ensure you meet all the eligibility criteria mentioned by the financial institution. This typically includes being a resident Indian, age requirements, holding approved mutual funds, and having all necessary KYC documents like PAN and Aadhaar.

Step 2: Select Your Lender

  • Choose a Financial Institution: Select a bank or a financial institution that offers loans against mutual funds. Compare their interest rates, terms and conditions, and list of approved mutual funds to find the best option for your needs.

Step 3: Gather Required Documents

  • Documentation: Prepare all required documents, including identity proof, address proof, bank account details, and the details of the mutual funds you intend to pledge. Since the process is digital, ensure you have electronic copies of these documents.

Step 4: Apply Online

  • Digital Application: Log on to the lender’s website or mobile app. Most financial institutions now provide a completely digital interface where you can fill out the application form for a mutual fund loan.

  • Enter Details: Provide necessary details about the mutual funds you want to pledge, your personal information, and the amount of loan you are seeking.

Step 5: Lien on Mutual Funds

  • Marking a Lien: As part of the application process, you will need to mark a lien on the mutual fund units you are pledging. This can usually be done online through the mutual fund registrar like CAMS or Kfintech, directly from the lender’s interface.

  • Authorization: Authorize the lien marking on your mutual fund units. This step is crucial as it secures the loan against your mutual funds.

Step 6: Loan Approval and Disbursal

  • Loan Approval: Once your application is submitted and the mutual funds are successfully lien-marked, the lender will process your application. If everything is in order, the loan will be approved.

  • Fund Disbursal: The loan amount will be disbursed into your linked bank account. Typically, this process is quick, and funds can be made available within a few hours to a day after approval.

Step 7: Manage Your Loan

  • Repayments: Utilize the funds as needed and adhere to the repayment schedule. Remember, interest accrues only on the amount utilized.

  • Monitoring: Regularly monitor your mutual fund values and loan account to ensure optimal management of both your loan and investments.

Required Documents for Applying for a Loan Against Mutual Funds

Applying for a loan against mutual funds involves a straightforward documentation process that can often be completed online. When you opt for a mutual fund loan, being prepared with the right documents is crucial to ensure a smooth application process. Here’s a list of essential documents you will typically need to provide:

1. Identity Proof

  • PAN Card: Mandatory for all financial transactions and serves as a primary identity proof.

  • Aadhaar Card: Required for KYC (Know Your Customer) compliance and can also serve as address proof.

2. Address Proof

  • Utility Bills: Recent electricity, water, or gas bills can be used if they are in your name.

  • Voter ID or Passport: Either of these documents can also serve as both identity and address proof if they contain your current address.

3. Bank Account Details

  • Cancelled Cheque or Bank Statement: A cancelled cheque of the bank account to which the loan amount will be credited. This helps in verifying the bank account details.

  • Account Holder’s Name and IFSC Code: Ensures that the loan amount is disbursed to the correct account.

4. Mutual Fund Documents

  • Statement of Mutual Fund Holdings: A recent statement that lists all the mutual fund units you hold. This document should show clear and current valuations of the mutual funds you intend to pledge.

  • Lien Marking Agreement: Some lenders might require a lien marking agreement or a declaration form that needs to be filled out to confirm that you agree to lien mark your mutual funds as collateral for the loan.

5. Income Proof (optional, varies by lender)

  • Salary Slips or Income Tax Returns: Though not always mandatory, some lenders might request proof of income to assess your loan repayment capacity.

6. KYC Documents

  • Completed KYC Form: Most lenders require a completed KYC form as part of the application process.

  • Photographs: Recent passport-sized photographs may also be required.

Digital Submission

The entire process for applying for a loan against mutual funds can often be completed digitally, which simplifies the submission of these documents:

  • Online Platforms: Most lenders allow you to upload scanned copies or digital versions of these documents through their online portals or mobile apps.

  • Document Safety: Ensure that all documents are legible and securely uploaded as per the instructions provided by the lender to prevent delays in your loan approval.

Gathering these documents beforehand can significantly expedite the application process for a loan against mutual funds. With the move towards digital applications, ensuring that you have digital copies of all necessary documents will make the process more efficient and less time-consuming. Being well-prepared with your documentation allows for a smoother and faster loan approval process, enabling you to access the funds you need without undue delay.

Conclusion

Opting for a loan against mutual funds offers a strategic advantage for accessing liquidity while keeping your investments intact. This type of financing, commonly referred to as a mutual fund loan, serves as a versatile tool that aligns with various financial needs, from emergency cash requirements to funding major expenditures without disrupting your long-term investment goals.

The process of applying for such a loan is streamlined through digital platforms, making it accessible and efficient. With minimal documentation required—primarily focusing on identity, residence verification, and proof of mutual fund holdings—you can set up the loan relatively quickly. The ability to maintain ownership and benefit from potential appreciation of your mutual funds even while borrowing against them adds a layer of financial flexibility that is not commonly available with other types of loans.

Prepare the required documents, and understand the terms and conditions of your loan agreement, so that you can effectively leverage your mutual fund investments to meet your immediate financial needs. This approach not only preserves your financial assets for future growth but also provides a safety net that can be crucial during times of financial uncertainty.

Ultimately, a loan against mutual funds stands out as a smart financial strategy for investors looking to balance liquidity needs with investment continuity. Whether you're navigating short-term financial challenges or planning for mid-term expenditures, this financing option offers a sustainable and intelligent way to manage your financial resources effectively.

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FAQs:

  1. How can I apply for a loan against mutual funds?You can apply for a loan against mutual funds by checking your eligibility, selecting an approved lender, and then completing an online application through the lender's website or mobile app. You will need to submit necessary documents such as identity proof, bank details, and mutual fund statements, and digitally mark a lien on the mutual funds you wish to pledge.

  2. What are the steps to repay a loan against mutual funds?To repay a loan against mutual funds, you can make payments towards the outstanding balance as per the terms agreed with the lender. This can often be done via an online banking portal. Interest is typically charged only on the amount utilized, and you can repay the loan at any time without prepayment penalties.

  3. What are the interest rates and other charges on Loans Against Mutual Funds?Interest rates on loans against mutual funds generally start around 9.5% per annum and can vary based on the lender and the market conditions. Additional charges might include processing fees or annual maintenance charges, but many lenders offer these loans with no foreclosure charges for early repayment.

  4. Who is not eligible for Loan Against Mutual Funds?Individuals who are not residents of India, those who do not own eligible mutual fund investments, or whose mutual funds are not registered with approved registrars like CAMS or KFintech are typically not eligible for a loan against mutual funds. Additionally, individuals under the age of 18 or over 75 may also be ineligible.

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