Investing in mutual funds can significantly contribute to wealth accumulation over time. Interestingly, these investments can also serve as collateral for securing a loan. Lenders may consider your mutual fund holdings as a guarantee, allowing you to obtain loans at competitive interest rates. Prior to approving the loan, lenders will evaluate the value of your investments.
Numerous banks and financial institutions provide loans against mutual funds, enabling you to access necessary funds without liquidating your investments. This approach is an effective strategy for addressing immediate financial requirements while preserving your long-term investment objectives. Let us explore the concept of a loan against mutual funds and the appropriate circumstances for applying for one.
What Is a Loan Against Mutual Funds?
A loan against mutual funds (LAMF) is classified as a secured loan, where your mutual fund units serve as collateral. The lender disburses funds based on the assessed value of your mutual fund assets. Notably, you can continue to earn returns on your investments even after they have been pledged. Typically, banks and non-banking financial companies (NBFCs) offer loans against both equity and debt mutual funds. However, the specific terms and loan-to-value (LTV) ratios may differ based on the type of mutual fund involved.
Also Read: Should you withdraw or reinvest your matured investments?
How Does a Loan Against Mutual Funds Work?
A loan secured by mutual funds operates by using your mutual fund units as collateral to obtain financing from a bank or a non-banking financial company (NBFC).
According to Adhil Shetty, CEO of Bankbazaar.com, the process begins with applying for the loan from a lender that provides this option. “After you submit the necessary documentation, the lender establishes a lien (a legal claim) on your mutual fund units, which restricts you from selling or redeeming them until the loan is fully repaid. The amount of the loan granted is contingent upon the type and valuation of the mutual fund units,” he says.
Typically, lenders may offer up to 50% of the value for equity mutual funds and between 70% to 80% for debt mutual funds. Once the loan is approved, the funds are directly deposited into your bank account.
You have the option to repay the loan through equated monthly installments (EMIs) or as a single payment, based on the lender’s conditions.
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