For investors who need ready access to money but do not want to redeem their mutual fund investments, a loan against mutual funds (LAMF) is a tempting possibility. Increasingly, these loans are being offered online, with disbursement and approval within a matter of hours. This allows investors to maintain their market exposure while availing themselves of the collateral value of their investment.
What is a loan against mutual funds?
A mutual fund loan is a secured loan where you pledge your mutual fund units as collateral to the lender. Instead of redeeming your investments and losing out on the possibility of appreciation or incurring exit loads, you can borrow against the value of them. The lender gets a lien on the mortgaged units until repayment of the loan.
How does the online process work?
All the lenders and fintech companies have joined hands with depositories like CAMS and KFintech to make the entire exercise paperless. Investors log in on a lender's website or mobile app using their PAN and depository credentials, select the mutual funds to be pledged, and do an e-sign. The lien is created in real time, and loan proceeds are credited directly into the borrower account. The whole process can be done within an hour or two without going to a branch.
Loan amount and eligibility
The borrowed amount varies with the net asset value (NAV) of the mutual funds put up and the margin rates of the lender. You can typically borrow 50% to 70% of the fund. Debt funds give higher percentages of borrowing, while equity mutual funds promote smaller margins due to volatility. Mutual funds are available to resident individuals as well as NRIs based on the lender's policies.
Interest rates and repayment
Interest rates on loan against mutual funds are generally lesser than on unsecured personal loans since they are secured by your holdings. Interest rates of 8% to 11% per annum are common from most lenders. Repayment can be flexible—with either paying only the interest for the tenure and repaying the principal subsequently, or opting for EMI-based repayment. The lien is released on your mutual funds on repayment of the loan.
Advantages and disadvantages
The biggest advantage is that you don't have to return your investments, i.e., you stay invested for long-term wealth creation. The online method has the facility of fast disbursal and minimal paperwork. Risks, however, include the possibility of a margin call—if prices collapse severely, the lender may demand more units to be pledged or repayment of half the loan to meet the compulsory margin. This default can make you sell your mutual fund units.
FAQs
1. Can I continue to earn a return on the mutual funds pledged?
Yes. Your units remain invested and earn a return. You can only be prevented from redeeming them until you repay the loan.
2. When can I get money by taking a digital loan against mutual funds?
In the majority of cases, disbursement and approval happen within 24 hours and sometimes within hours depending on the lender and your KYC status.
3. Is there a minimum investment that you must have to avail of this loan?
Yes, most lenders require a minimum amount of holdings in mutual funds —typically, ₹25,000 to ₹50,000 worth—before you can pledge them for a loan.
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