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How to Apply for Loan Against Mutual Fund?

A mutual fund is one of the most popular investments tools in India. A lot of people invest in mutual funds to earn valuable returns as well as save for the future. Apart from various benefits of mutual funds investment, you can also avail loan against your mutual fund holding. Read on to know more.

Getting started with Loan against mutual funds

Often, people face a situation where they may need instant finance to meet an urgent expense. Although approaching a financial organization for a persona loan or a loan against property is the most preferred way to get quick funds, there is another effective alternative. In case you want to invest in mutual funds through a loan, then you can do so with an overdraft facility.

Loan against mutual funds

Among several other options, you can apply for a loan against MF. One of the significant advantages of this type of loan is that you need not keep any tangible asset like property or gold as collateral to procure the necessary funds. Also, you need not redeem the funds prematurely and risk losing the potential returns the funds may earn. This also means that you can continue with your Systematic Investment Plan or SIP without any hitch.

Many financial institutions offer loan against mutual fund, which is similar to an overdraft facility. The process requires minimal paperwork, and you can avail it within minutes. Whether you are holding equity or hybrid mutual fund, you can choose a bank of your choice to borrow a loan.

In exchange for the loan, the bank requires you to pledge your mutual fund holdings as security. Based on the value of MF units, the bank decides the loan amount and the term period for repayment.

Benefits of applying for a loan against mutual fund units

  • The interest rate on loan against mutual funds is low as it is a secured loan type

  • You get instant liquidity against the mutual fund units in your portfolio

  • A great way to grow your wealth for your short-term financial goals

The interest is one of the critical factors that you must consider while applying for a loan against mutual funds. The interest rates on such loans are low; generally it ranges between 10% and 12%. However, the rates vary depending on the bank you choose.

If you apply for a personal loan for mutual fund investment, you will have to bear the high-interest rate. On the contrary, if you select loan against mutual funds and you have a good credit score, the banks will charge lower interest rates.

What is Lien for Mutual funds?

So, before you get into the details of how to apply for a loan against MF, it is paramount to know what lien on mutual funds is. Lien is a document type that gives your bank the right to sell or hold your mutual fund units as repayment of debt. The bank can mark a lien on all or part of the units in a portfolio. Below is the process to mark a lien on mutual funds:

  • Write a letter to your fund house that includes your name, folio number, the scheme type, the number of units for which you want to mark lien.

  • Sign the letter & attach a verification letter given by the bank

  • The Fund House will send the letter to the bank with the copy of the investor

How to avail loan against Mutual Fund?

You can apply for Loan against Mutual Funds online if you hold your mutual funds in Demat form. Before evaluating your loan application, the bank will inform fund registrar to mark the lien on mutual fund units that you have pledged as a security.

The registrar will then mark the lien and send the copy of lien document to you and the bank, where you wish to apply for a loan against mutual funds. Note that once the lien is marked, you cannot redeem the units till the time you repay the loan.

One of the essential things to know about availing loan against mutual funds is that the amount you can borrow depends on the type of mutual funds you own. For instance, if you have equity-based funds in your portfolio, you can avail about 50% - 60% of the NAV (Net Asset Value) of the funds. Some lenders may also have a maximum cap on the loan amount you can apply for.

To conclude, applying for a loan against mutual fund units is an excellent way to get funds for your immediate financial needs.