Taking a loan against mutual funds is an effective strategy to unlock the value of your investments without selling them. This financial solution allows investors to access funds while retaining the potential for future gains. This article delves into the concept of a loan against mutual funds, exploring its benefits, application process, top financial institutions offering these loans, and real-life use cases.
What is a loan against mutual funds?
A loan against mutual funds is a type of secured loan where investors pledge their mutual fund units as collateral to obtain a loan from financial institutions. This loan facility allows investors to unlock the value of their mutual fund investments without selling them.
How does it work?
To obtain a loan against mutual funds, you pledge mutual fund units to the lending institution, which grants a loan amount based on the current value of the pledged units. The amount sanctioned typically ranges from 50% to 70% of the mutual funds’ net asset value (NAV). This type of loan is beneficial as it provides liquidity while allowing the investor to retain ownership of their mutual fund investments.
Comparison with other types of secured loans
Compared to other secured loans, such as loans against property or gold, a loan against mutual funds offers unique advantages. It is generally quicker to process, involves minimal documentation, and often has lower interest rates. Additionally, since the mutual funds remain invested, they continue to earn returns, which can be advantageous for the borrower.
Benefits of taking a loan on mutual funds
Lower interest rates compared to personal loans
One of the primary advantages of taking a loan on mutual funds is the lower interest rates compared to unsecured personal loans. Since the loan is secured against the mutual fund units, lenders offer more favourable interest rates, making it a cost-effective borrowing option.
Retaining ownership and potential appreciation
When you take a loan against mutual funds, you retain ownership of your mutual fund investments. This means that your investments continue to grow and earn returns even as you utilise the loan amount. This dual benefit of liquidity and potential appreciation makes this type of loan particularly attractive.
Quick approval and disbursal process
The approval and disbursal process for loans against mutual funds is typically quick and straightforward. Most financial institutions offer instant loans against mutual funds with minimal documentation, ensuring that you can access funds promptly to meet urgent financial needs.
Flexibility in repayment terms
Loans against mutual funds often come with flexible repayment terms. Depending on their financial situation, borrowers can choose to repay the loan in monthly instalments or as a lump sum. This flexibility makes it easier to manage loan repayments without straining finances.
How to apply for a loan against mutual funds online?
Applying for a loan against mutual funds online is a simple and convenient process. Here is a step-by-step guide to help you navigate the application process:
Choose a financial institution:
Research and select a financial institution that offers loans against mutual funds. Compare interest rates, processing fees, and other terms to make an informed decision.
Visit the official website:
Once you have chosen a lender, visit their official website and navigate to the loan against mutual funds section.
Fill out the application form:
Complete the online application form with the required details, including your personal information, details of the mutual funds you wish to pledge, and the loan amount you need.
Submit required documents:
As part of the application process, upload the necessary documents, such as your identity proof, address proof, and mutual fund statement.
Verification and approval:
The lender will verify your application and documents. Once verified, the loan will be approved, and you will receive the loan amount in your bank account.
Top financial institutions offering loans against mutual funds
Here is a list of some leading financial institutions that offer loans against mutual funds, along with their features and interest rates:
HDFC Bank
- Interest Rate: 9.50% – 12.00%
- Features: Quick processing, flexible tenure, minimal documentation
ICICI Bank
- Interest Rate: 10.00% – 11.75%
- Features: Instant loan approval, competitive interest rates, online application
Axis Bank
- Interest Rate: 10.25% – 12.50%
- Features: Easy online application, fast disbursal, attractive interest rates
State Bank of India (SBI)
- Interest Rate: 9.75% – 11.50%
- Features: Low interest rates, extensive branch network, simple process
Use case: successful applications of loans against mutual funds
Use case 1: emergency medical expenses
Mr. Raj, a mutual fund investor, faced a sudden medical emergency in his family. Instead of selling his investments at a loss, he opted for an instant loan against mutual funds. The quick disbursal process provided him with the necessary funds to cover medical expenses while his investments continued to grow.
Use case 2: business expansion
Ms. Priya, an SME owner, needed funds for business expansion. She leveraged her mutual fund investments to secure a loan against mutual funds online. The loan provided her with the required capital at a lower interest rate, enabling her to expand her business without liquidating her assets.
Use case 3: educational expenses
Mr. Anil wanted to finance his child’s higher education. By taking a loan on mutual fund investments, he accessed the necessary funds without disturbing his long-term investment goals. The flexibility in repayment terms allowed him to manage his finances effectively while supporting his child’s education.
Conclusion
Loans against mutual funds offer a versatile and advantageous financial solution for meeting urgent monetary needs. By leveraging your mutual fund investments, you can access funds at lower interest rates, retain ownership of your investments, and enjoy a quick and flexible loan process. Whether it’s for emergency expenses, business expansion, or educational needs, this financial tool can be a prudent choice. Consider exploring this option to unlock the potential of your investments while securing the funds you need.
FAQs
What is the tenure of the loan against MF?
The tenure of a loan against mutual funds typically ranges from a few months to several years. The exact tenure can vary depending on the lender and the loan amount. Some lenders offer flexible repayment options, allowing you to choose a tenure that suits your financial needs.
How much loan can I get on mutual funds?
The loan amount you can obtain against your mutual funds depends on the net asset value (NAV) of your holdings. Most lenders offer loans ranging from 50% to 70% of the NAV. However, the exact amount can vary based on factors such as your credit score, the type of mutual funds you hold, and the lender’s policies.
Is it advisable to take a loan against mutual funds?
Whether it’s advisable to take a loan against mutual funds depends on your specific financial situation and goals. If you need funds for a short-term need and prefer not to liquidate your investments, a loan against mutual funds can be a viable option. However, it’s essential to consider the interest rate, repayment terms, and the potential impact on your overall financial plan before making a decision.
How to repay a loan against mutual funds?
Repaying a loan against mutual funds is similar to repaying any other loan. You typically make regular monthly instalments, which include both the principal amount and interest. Some lenders may also offer options for prepayment or part-prepayment without any penalties. It’s essential to adhere to the repayment schedule to avoid default and maintain a good credit score.