Loan against Mutual Funds or Securities

Loan against Mutual Funds or Securities

Loan against Mutual Funds or Securities could be taken from a bank or a NBFC (Non Banking Finance Company). It is one of the ways to fulfill your financial need without selling your Mutual Funds units or Securities. This facility is similar to bank overdraft. You can pledge your mutual funds or securities to banks or NBFCs when you are in need of cash for short tenures (Ranging from three months to one year).

Loan against Mutual Funds

All types of mutual funds like equity, debt oriented, hybrid or liquid funds can be pledged with the bank or NBFC for borrowing funds. However, loan against equity mutual funds is recommended as against debt or liquid funds by financial planners. The interest rate could be anywhere between 11-12% for a loan against mutual funds depending on the amount of loan you take and the tenure. Usually, you will get 60-70% loan against the market value of your pledged mutual fund units. In this post, let’s look at the process of getting a loan against mutual funds.

Features of Loan against Mutual Funds

1. The process of getting a loan against mutual fund is quick.

2. 60-70% loan against the market value of your pledged mutual fund units.

3. The interest rate could be anywhere between 11-12%.

4. No guarantor is required for availing loan against mutual funds.

5. Pre-payment of loan is allowed.

6. You cannot sell your pledged mutual fund units until the loan is repaid.

7. The loan can be closed anytime by paying the entire amount.

8. In case you default in making payment, the bank/NBFC can enforce the lien.

How to apply for a loan against mutual funds?

Loan against Mutual Funds could be taken from almost every bank or NBFC. Some bank offers this facility online. Therefore the sanctioning, as well as disbursal of the loan, is faster if you are holding your mutual fund units in demat form. For this, just log on to the online portal of the bank or NBFC. Fill the required information in the application form and get the approval for a loan against mutual funds. If you are holding your mutual funds in physical form then you need to execute a loan agreement with the bank or NBFC. The bank or NBFC will write to the mutual fund registrar like Karvy or CAMS and ask them to mark a lien on the number of units applied for the loan. Once this process is complete, the bank or NBFC will lend the loan against mutual funds.

Removal of Lien

When the loan is repaid by you, the bank or NBFC can ask for the removal of the lien and send a request letter to the fund house. When you pay a partial payment, the bank or NBFC can also send a request for a partial removal of the lien. And in such case, lien on some of the units will be removed.

What happens if you default in making payment to bank or NBFC?

If you default in making payment, the bank or NBFC can enforce the lien. It means bank or NBFC will send a signed request to the mutual fund to sell the pledged units and send the money to the bank or NBFC.

The advantage of loan against mutual funds is that it provides immediate liquidity against the mutual fund units. This type of loan is a good option if you are looking for a short-term loan. Loan against mutual funds is also a good alternative to a personal loan. Please note that if you default in making payment, the bank or NBFC can enforce the lien and recover the loan amount.

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Loan against Mutual Funds or Securities