Essential Facts About Borrowing Money Using Your Mutual Fund Asset
Accessing Liquidity with Loans Against Mutual Funds
When you need quick access to funds without selling your mutual fund holdings, loans against mutual funds could be a viable option. Here's what you need to know about this type of loan.
Loan Limit
The loan amount you can borrow is determined by the Loan-to-Value (LTV) ratio applied to the market value of your pledged mutual funds. Typically, up to 80% of the mutual fund portfolio value can be borrowed. For instance, IDFC FIRST Bank offers loans up to Rs. 10,00,000 against equity mutual funds and up to Rs. 50,00,000 against debt mutual funds. The Reserve Bank of India limits banks to loans up to Rs. 20,00,000, while NBFCs may offer higher amounts.
Which Banks/Financial Institutions Offer Such Loans
Many banks and NBFCs offer loans against mutual funds. Some examples include HDFC Bank, ICICI Bank, IDFC FIRST Bank, and various other lenders. Each lender maintains an approved list of mutual fund schemes eligible for pledging.
Interest Rates
Interest rates for loans against mutual funds usually start from around 10-10.5% and can go up to 12% or more, depending on the lender and your profile. Interest is typically charged only on the utilized amount if offered as an overdraft facility.
Benefits Compared to Other Loans
Compared to unsecured loans like personal loans or credit card loans, which can have rates around 12-15% or higher, loans against mutual funds offer lower interest rates. This type of loan allows you to retain your mutual fund ownership, helping you continue earning returns while having quick access to funds. Additionally, loans against mutual funds usually have flexible repayment options and the ability to repay the principal anytime to reduce interest.
Summary
In comparison to personal loans (unsecured) and loans against property (collateral), loans against mutual funds have their unique advantages and disadvantages (see table below). Overall, loans against mutual funds provide a cost-effective and efficient way to access liquidity while keeping your investment intact, but loan amount limits and eligibility depend on the specific lender and scheme pledged.
| Factor | Loan Against Mutual Funds | Personal Loan (Unsecured) | Loan Against Property (Collateral) | |------------------------|--------------------------------------------|------------------------------------|------------------------------------| | Loan Limit | Up to ~80% of MF value, typically Rs. 10 - 50 Lakh or more (varies) | Lower, Rs. 50,000 to Rs. 10 Lakh | Much higher, possibly Rs. 100s Crore | | Interest Rate | Around 10.25% - 12% | Generally higher, ~12-15% or more | Lower than unsecured loans | | Approval Speed | Moderate, requires asset verification | Fastest, based on credit profile | Slower, involves property valuation | | Loan Tenure | Flexible (often 12 months, renewable) | Shorter tenure | Longer tenure | | Risk | Pledged assets liquidated if defaulted | Credit score hit if defaulted | Property lien until repaid | | Benefits | Retain MF ownership, lower interest | No collateral, fast disbursal | High loan amount, lower rates |
Keep in mind that not all banks lend money against all mutual fund schemes, and the interest rates can vary based on the bank and the mutual fund schemes chosen. Additionally, the bank has the right to sell the pledged mutual fund units only in case of default. When pledging mutual fund units, the units remain invested in the market, allowing the investor to continue earning returns.
Overall, loans against mutual funds offer a practical solution for accessing liquidity without selling your mutual fund holdings. It's essential to research and compare various lenders to find the best option for your financial needs.
In case you need an alternative to personal-finance options like personal loans or fixed deposits, loans against mutual funds could be a good consideration due to their lower interest rates and the ability to retain fund ownership, as you continue to earn returns while accessing quick funds. Remember that many banks and financial institutions, such as HDFC Bank, ICICI Bank, IDFC FIRST Bank, offer such loans against specific mutual fund schemes, and the interest rates can fluctuate based on the lender and scheme chosen.
