Introduction
A Loan Against Mutual Funds (LAMF) is a secured loan where investors pledge their mutual fund units as collateral to avail funds without liquidating their investments. This financial product is gaining popularity due to its lower interest rates, quick disbursal, and flexibility compared to personal loans.
This guide explores the workings, benefits, risks, and application process of loans against mutual funds.
How Does a Loan Against Mutual Funds Work?
When you take a loan against mutual funds:
- You pledge your mutual fund units as collateral.
- The lender (banks or NBFCs) sanctions a loan based on the Net Asset Value (NAV) of the funds.
- The loan amount is typically 50-75% of the NAV for equity funds and up to 85% for debt funds.
- You continue to earn returns on your mutual funds while repaying the loan.
Loan-to-Value (LTV) Ratio for Different Funds
| Type of Mutual Fund | LTV Ratio (%) |
|---|---|
| Equity Funds | 50-75% |
| Debt Funds | 75-85% |
| Hybrid Funds | 60-75% |
(LTV ratios may vary by lender)
Eligibility Criteria
- KYC-compliant mutual fund holdings
- Funds should not be under lock-in period (like ELSS)
- Good credit score (varies by lender)
- Minimum investment value (usually ₹50,000 or more)
Benefits of Loan Against Mutual Funds
✅ Lower Interest Rates (compared to personal loans)
✅ No need to sell investments (continue earning returns)
✅ Quick disbursal (within 24-48 hours)
✅ Flexible repayment options (interest-only or EMI)
✅ No prepayment penalties (in most cases)
Risks and Considerations
⚠️ Market Risk: If NAV falls significantly, lenders may ask for additional collateral.
⚠️ Margin Call Risk: If pledged funds’ value drops below a threshold, lenders may force liquidation.
⚠️ Interest Costs: While lower than personal loans, interest still adds to financial burden.
⚠️ Not All Funds Are Eligible: ELSS and close-ended funds may not qualify.
Comparison with Other Loan Options
| Parameter | Loan Against MF | Personal Loan | Gold Loan |
|---|---|---|---|
| Interest Rate | 9-12% p.a. | 10-24% p.a. | 7-14% p.a. |
| Collateral Needed | Mutual Funds | None | Gold |
| Processing Time | 1-2 days | 2-7 days | 1-2 days |
| Loan Tenure | Up to 3 years | Up to 5 years | Up to 3 years |
How to Apply for a Loan Against Mutual Funds
- Check Eligibility – Ensure your mutual funds are eligible.
- Choose a Lender – Compare interest rates and terms.
- Submit Application – Provide KYC, fund details, and bank statements.
- Pledge Mutual Funds – Lender will block units in your Demat account.
- Receive Funds – Disbursal usually happens within 48 hours.
(Some lenders offer online applications for faster processing.)
Conclusion
A loan against mutual funds is a smart way to access liquidity without selling investments. It offers lower interest rates, quick processing, and flexibility. However, borrowers must assess risks like margin calls and market volatility before opting for this loan.
For tailored advice, consult a financial advisor.
Disclaimer
The information provided in this article is for educational purposes only and should not be construed as financial advice. Mutual fund investments are subject to market risks. Please read all scheme-related documents carefully before investing or availing a loan. The loan terms, interest rates, and eligibility criteria may vary across lenders. Always consult a certified financial planner or loan advisor before making any financial decisions.
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