A loan against mutual funds is an effective financing option that allows investors to access funds without selling their investments. By pledging mutual fund units as collateral, individuals can secure a loan from banks or financial institutions. This method provides a practical solution for short-term financial needs while enabling investors to retain their portfolio and continue benefiting from market growth.
 

What is a Loan Against Mutual Funds?

A loan against mutual funds enables investors to leverage their investment portfolio as collateral. Rather than selling units to raise cash, investors can temporarily pledge their mutual fund holdings to secure financing. Banks and Non-Banking Financial Companies (NBFCs) offer this option to individuals with eligible mutual fund investments. As a secured loan, the risk is lower for lenders, often resulting in lower interest rates compared to unsecured personal loans.
 

Types of Mutual Funds Accepted as Collateral

While not all mutual funds are accepted for pledging, most lenders prefer funds that carry lower risk and stable performance. Commonly accepted fund types include:

• Large-cap equity funds – Stable and less volatile, making them a preferred choice for lenders.
• Debt mutual funds – Known for stable returns, these are often accepted for a higher Loan-to-Value (LTV) ratio.
• Liquid mutual funds – Due to their low risk and liquidity, these are ideal for securing loans.

Before applying, it’s crucial to confirm with your lender whether your mutual fund qualifies for pledging.
 

How to Apply for a Loan Against Mutual Funds

The process of applying for a loan against mutual funds is straightforward and can be completed either online or offline. Here’s a step-by-step guide to help you understand the procedure:
 

Step 1: Submit a Loan Application Form

To begin the process, submit a completed loan application form along with details of your mutual fund holdings. Depending on the lender, you can apply either:

• Online: Many financial institutions offer seamless online applications via platforms like CAMS and KFintech.
• Offline: You can visit the lender’s branch, fill out the form, and submit the required documents.

Step 2: Creation of Lien on Mutual Fund Units

A lien is a legal claim that allows the lender to temporarily hold your mutual fund units as collateral. While the units remain in your portfolio, the lien ensures that they cannot be redeemed until the loan is repaid. The lien creation process is managed through your mutual fund house or the depository. Platforms like CAMS and KFintech simplify this process, enabling online lien marking without the need for branch visits.
 

Step 3: Loan Approval Based on Loan-to-Value (LTV) Ratio

Once the lien is created, the lender assesses the value of your pledged units. The approved loan amount is determined by the Loan-to-Value (LTV) ratio.

• For equity mutual funds, lenders typically offer between 50-70% of the Net Asset Value (NAV).
• For debt mutual funds, the LTV ratio is usually higher, going up to 80% of the NAV.

Lenders evaluate the portfolio’s value, market conditions, and risk profile before approving the loan.

Step 4: Fund Disbursement

After the loan is approved, the sanctioned amount is credited directly to your bank account. This ensures a swift process, allowing you to access funds for urgent needs.
 

Step 5: Repayment and Release of Lien

During the repayment period, you will need to pay interest on the sanctioned loan. Once the full repayment is completed, the lender removes the lien from your mutual fund units, restoring your full ownership.
 

Interest Rates and Charges

Interest rates on loans against mutual funds are typically lower than unsecured personal loans. However, rates may vary based on:

• The type of mutual fund pledged
• The lender’s policies
• The LTV ratio assigned to your investment

For instance:

• Equity fund loans may carry slightly higher rates due to the market's volatility.
• Debt fund loans typically feature lower rates, given their stability.

Benefits of Taking a Loan Against Mutual Funds

Securing a loan against mutual funds offers several advantages for investors:

1. Preserve Investments: Investors retain their mutual fund units, allowing them to benefit from potential market growth.
2. Lower Interest Rates: Since this is a secured loan, interest rates are generally lower than those for personal loans.
3. Fast Disbursement: Loan processing is quicker due to minimal documentation and automated lien creation via CAMS or KFintech.
4. Flexible Usage: Funds can be used for diverse financial needs such as medical expenses, education, home repairs, or emergencies.
5. No Impact on SIPs: Systematic Investment Plans (SIPs) continue unaffected, helping investors stay on track with their financial goals.

Risks and Considerations

While loans against mutual funds are a convenient option, there are some key risks to consider:

• Market Fluctuations: The NAV of pledged units may decline in volatile market conditions, potentially impacting your LTV ratio.
• Redemption Restrictions: The pledged units cannot be sold or transferred until the lien is removed.
• Repayment Risks: If you fail to repay the loan, the lender has the right to redeem your pledged units to recover the outstanding balance.

Who Should Consider a Loan Against Mutual Funds?

This option is ideal for:

• Investors seeking short-term funds without liquidating investments.
• Individuals with high-performing portfolios who wish to retain long-term growth opportunities.
• Those seeking lower interest rates compared to unsecured borrowing options.

A loan against mutual funds is an efficient financial solution that helps investors access liquidity while retaining their investment exposure. By pledging equity, debt, or liquid funds as collateral, borrowers can unlock value without compromising their long-term financial goals. Before applying for a loan, ensure you evaluate the lender’s terms, LTV ratios, and interest rates. Managing repayments responsibly will ensure you maximize this opportunity while continuing to benefit from your mutual fund investments.