Why loan against Mutual Funds is a convenient option for investors

Why loan against Mutual Funds is a convenient option for investors

Most of us would have encountered a time when there was an urgent need for funds for an unplanned or unaccounted expense. This could be as sudden as a medical emergency or house repair that needs urgent attention. In such cases, the first thing that we can think of is redeeming our investments. What if in such a scenario your investments are performing poorly, and you don’t want to redeem them or there are some investments that hold sentimental values like gold.

The next option then takes us to personal loans, credit cards or new-age products like buy now pay later loans (BNPL). As most of us know all of these are unsecured loans, for those not aware unsecured loans are ones where you do not provide any collateral to avail of the loan. Now one primary reason we take this route is they are quicker & easier to avail compared to a secured loan.

But if you aim to avail loan at a comparatively lesser rate of interest or don’t want to redeem your mutual funds, let us introduce to you that you can also avail loan against your mutual funds instead of redeeming them. In this article, we will clear some myths or try and answer some common questions pertaining to the same.

How to get a loan against your mutual fund holdings?

You will have to pledge your mutual fund units to the banking or the lending institution (NBFC) from where you aim to avail the loan. Your mutual fund units can either be in Demat or physical form. If your units are in Demat form, you will have to pledge the units with the depositories e.g. NSDL, CDSL. If your units are in physical form then the bank / NBFC will ask the Registrar and Transfer Agency (RTA) e.g. CAMS, Karvy, to mark a lien on the units pledged with the bank / NBFC. Please note that once your mutual units are pledged (on lien) to the bank / NBFC, you cannot redeem your units till you have closed the loan. However, you continue to retain ownership of mutual fund units and enjoy all the benefits associated with them.

How much loan will you get against mutual funds?

The loan amount will depend on the type of mutual fund scheme against which you want to avail the loan. Usually, you can get around 50% of the value of pledged equity/ hybrid mutual fund schemes (Total value = Net Asset Value (NAV) of the units x number of units), subject to maximum loan limit as specified by the bank / NBFC. For example, if the current market value of your equity fund holding is Rs 50 lakhs, you can avail around Rs 25 lakhs as loan against your equity fund holding. For debt mutual funds, you can get up to 80 – 85% of the value of pledged debt mutual fund schemes. Different lending institutions have different margin requirements for loans against equity and debt mutual funds.