Loan Against Mutual Funds – Get Loan on Mutual Funds in India

Financial crisis can hit you anytime and therefore you must always be prepared to face them. But sometimes, there may be a situation when you have the funds but you have invested them in different investment avenues and you do not have the extra funds to deal with the monetary needs in your life. In such situations, mutual funds can act as a saviour. You can use them as security to avail a loan from financial institutions or banks. In this article, you will learn all the details about loan against mutual funds.

Let us begin by learning how you can avail loan against mutual funds.

How to Avail Loan on Mutual Fund?

By pledging the mutual fund units, you can avail loan against mutual funds. You can take the loan on mutual fund of any type including equity, debt, or balanced fund. However, it is always advisable to take the loan against equity-based mutual funds and not against debt-based mutual funds. The loan against mutual funds interest rate depends upon the period of the loan. When you opt for taking a loan against the mutual funds, you cannot sell or switch the mutual fund unit that is under lien.

Let us now understand the term lien on mutual funds.

Lien on Mutual Funds

Lien is an important term to understand while availing loans against mf. Lien is a document that gives the NBFC or banks the right to sell or hold your mutual fund's units. When a lien is provided in the favour of bank or NBFC, it means that you have given the ownership right of your mutual fund units to the lender. To transfer the ownership you must visit the fund house and request them to transfer the ownership of your mutual fund units in the name of the lender. The letter for lien transfer must be signed by all the unit holders.

• Let us now learn about the process of applying for a loan against mutual funds
• How To Apply For Loan Against Mutual Funds

You can avail loan against mutual fund online if your mutual fund units are in demat account and you have prior approval. However, if the mutual fund units are in physical form you can avail loan on mutual fund by executing a loan agreement with the financing company or bank. The bank or NBFC shall ask the registrar of the mutual fund like Karvy or CAMS to mark a lien on the fund units being pledged. The registrar on marking the lien sends a letter to the lender along with a copy to the borrower regarding the same. One important aspect that you must know here is that you cannot redeem the units until full repayment of the loan. The money you get for the loan will depend on the type of mutual funds you own. Banks and other financial institutions often set the maximum and minimum cap on the amount of loan that you can apply for. For example, if you own equity-oriented mutual funds, you can get a loan of up to 50% of the Net Asset Value of the mutual fund.

Let us now learn about interest rates on loans against mutual funds.

Interest Rates on Loan Against Mutual Fund

The loan against mutual funds interest rate will depend on the tenure of your loan. Similar to the terms and conditions, the interest rates vary from one financer to another. In general, the interest on the loan of mutual funds is 10% to 11%. Since this is a secured loan, the interest on this loan is lower than the interest on an unsecured loan. They may even lower the interest rate if you have a good credit score and a long standing relationship with the bank.

• Let us now learn how to remove lien on the mutual funds
• How to Remove Lien on Mutual Funds

After repaying the loan amount, the financer will send a request regarding the lifting of lien to the fund house. You can even apply for partial removal of lien on making part payment to the financier. However, some units shall still be under the claim of the lender.

Since you know the process of removal of lien, you must also know the consequences if you default the loan.

Consequences of Defaulting Loan Against Mutual Fund

If you default the loan on mf, the financier can enforce a lien for defaulting in making the payment. The financing company holds the right to send a request to the mutual fund company to redeem the units.

Let us now learn about the benefits of borrowing against mutual funds.

Benefits of Borrowing Against Mutual Funds

You can create instant liquidity by taking the loan against mutual funds.

Since mutual fund investment remains idle most of the time, you can raise capital for meeting the short term requirements.

Since the mutual fund is a secured asset, the interest rate of the mutual funds is lower than the interest rate on a personal loan.

For taking a loan on mutual funds, there is no need for selling the mutual fund units.

The above mentioned are a few of the benefits of availing loans on mutual funds. Raising loans against mutual funds is a rare practice and not many are aware of it. It is also a far better option than other traditional methods of availing a loan. If you are new to the market or need any financial advice, you may contact IndiaNivesh.

Disclaimer: Investment in securities market / Mutual Funds are subject to market risks, read all the related documents carefully before investing.