All About Loans against Mutual Funds| North Loop Official Blog
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29 Oct 2020

All About Loans against Mutual Funds

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Introduction -

The first question that comes in mind is that ‘can we take loan against mutual funds?’ Well, if you are a mutual fund investor, you can avail loans against your mutual funds investment in times of a financial crisis. These funds not only give good returns in the long term but also become a reliable source of security for availing loans from banks. The interest also gets charged only on the amount taken as credit. However, before taking loans against mutual funds, you must check the list of mutual fund schemes that are approved by banks for sanction of the loans.
Now that we have answered your query to ‘can we take loan against mutual funds?’, let us look at the various advantages of taking such loans and the rates of interest that get charged.

Interest rates for loans against mutual funds -

The interest rates on such loans are lower than that on personal loans and are usually in the range of 10-12% per annum. They can, however, vary based on the terms and conditions set by your lender as well as the loan tenure. Even then, since it is a secured loan, it will be lower than that of an unsecured one. Also, if you have a satisfactory credit score and are a regular customer of the bank which will sanction your loan, you can attain lower interest rates.

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How to avail loan on mutual fund?

To avail loan on mutual fund, you have to enter into an agreement with your bank and grant ownership of the mutual fund scheme to it. That means your mutual fund investments can act as collateral for the loan sanctioned. Each financial institution has a specific list of approved mutual funds against which they provide loans. That is why, if you are keen on taking loans against your investments, it is best to choose fund mutual fund schemes that are approved by the banks for this purpose.

In case of equity funds, the limit of the loan is usually up to 50% of the NAV. For debt funds, it is around 70-80%. Application for such loans involves marking of lien on the mutual funds units in favour of the bank or other financial institution. That means, once that gets done, you cannot sell or redeem your mutual fund units.

How to apply for a loan against mutual funds -

You can apply for loans against mutual funds easily if you hold units in the Demat form and have prior permission. A physical agreement with the bank or lender becomes mandatory is you own the fund physically. After your bank marks a lien on the number of units getting pledged, the registrar does the same and sends a letter to confirm it. An important point to note here is that the lien gets marked against the units of the fund and not the amount. That means you cannot redeem the units till you repay the loan.

How to revoke the lien?

A lien can get revoked only if, the bank or lender confirms in writing that the collateral can get released in your favour. Partial removal of the lien can also get enforced in case of part payment of the loan. However, your bank can reinforce the lien if you fail to repay the loan amount in the specified duration.

Digital loan against mutual funds -

A digital loan against mutual funds can get availed without involving much paperwork. You only need a savings bank account to begin the process. However, most banks currently allow only eligible folios with a single holding to get pledged for this kind of loan facility. A digital loan against mutual funds can prove to be beneficial as it gets disbursed quickly, and you can continue your investments while also earning the dividends.

Benefits of borrowing loan against mutual funds -

Some of the main benefits are as follows -
  • It offers instant liquidity against your mutual fund units during a cash-crunch.
  • It is an acceptable way of raising capital for short-term financial requirements.
  • The interest rates offered on such loans are lower than that on personal loans.
  • It prevents you from liquidating your investments at a loss during a financial crisis.

Conclusion -

These help you to access a corpus of funds without losing out on the ownership of your mutual fund investments and are suitable alternatives for raising an emergency capital. If you do not want to borrow, you can also redeem your mutual fund units while they are profitable. Overall, loans against mutual funds are a suitable financing option. However, professionals recommend that if you are an aspiring borrower and are investing in mutual funds, it is best to check in advance with your bank whether they can get pledged for loans or not.

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This publication is provided for general information purposes only and is not intended to cover every aspect of the topics with which it deals. It is not intended be advice. You must obtain professional advice before taking, or refraining from, any action on the basis of the content in this publication. The information in this publication does not constitute legal, tax, investment or other professional advice from North Loop or its affiliates. We make no representations, warranties or guarantees, whether express or implied, that the content in the publication is accurate, complete or up to date. All opinions expressed do not reflect the views of North Loop nor are endorsed by North Loop.