Loan against mutual funds: How to leverage your investments for quick cash?
Let’s say you are in your favourite coffee shop, sipping your latte, and suddenly an unexpected expense pops up in your mind.
It could be a medical emergency, a wedding in the family, a new opportunity that might require money, etc.
What would be your first thought?
“Where will I get the money without disrupting my investments and savings?” Right?
Well, if you are doing investments the answer is sitting inside your investment portfolio.
Did you know you can leverage your mutual funds investments to get quick cash without redeeming them?
If not, read and scroll through this blog and explore about Loan Against Mutual Funds (LAMF). In this blog, we’ll break down the meaning, charges, eligibility criteria, interest rates, and other essential details about loans against mutual funds in a simple way.
Let’s get started with the basics..
What is Loan Against Mutual Funds?
Loan against mutual funds is a type of secured loan where you pledge your mutual fund units as collateral to get funds from banking or a non-banking financial company (NBFC). The lender holds the lien on your pledged units but you remain the owner and continue to earn returns on your investments. This way you get the cash you need while your investments stay intact.
How does it work?
A key component of a Loan Against Mutual Funds (LAMF) is the concept of lien marking. When you pledge your mutual fund units as collateral for the loan, the lender places a lien on these units. This means the lender has a legal claim to your mutual funds in case you fail to repay the loan. However, even with the lien in place, you continue to hold ownership of the mutual funds and can still earn returns, such as dividends or capital appreciation. The lien simply acts as a safeguard for the lender, ensuring they can recover the loan if needed, while you retain full control over your investment until repayment.
Why should one consider loans against mutual funds?
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Keep your investment journey going
Think that you are investing from the last 5 years, and your portfolio is growing steady at 12% annually. Now, to simply access your funds when needed, you have to redeem your units. By doing this you not only lose the compounded growth but also face tax implications. Taking a loan against these units, lets you keep your investment journey intact while accessing the fund you need.
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Quick disbursal
Waiting for weeks and weeks for loan approval is not always an option. This is where loan against mutual funds shine brightly. The loan is often approved and distributed in 2 Working Days ( Up to 3 lacs in 2 Hours), provided you meet the eligibility criteria and have the required documents in place.
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Unmatched Flexibility
LAMF provides flexibility in terms of loan tenure and repayment options. You can repay the loan in monthly EMIs in different tenures starting from 6 months to 84 months. LAMF adapts to your financial requirements, making it an excellent choice for investors seeking liquidity without rigidity.
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Fewer documentation
One of the reasons loans against mutual funds are so convenient is the minimal documentation involved. Since your mutual fund units act as collateral, lenders don’t require exhaustive paperwork, such as income proof or elaborate credit history checks. All you need is proof of ownership of the mutual fund units, a valid KYC (Know Your Customer) record, and basic identification documents. Some lenders even offer completely digital processes, making it even more seamless.
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Attractive interest rates
Another significant advantage of a Loan Against Mutual Funds (LAMF) is the comparatively lower interest rate. Traditional credit options, such as credit cards and personal loans, often come with steep interest rates ranging from 15 to 44 percent annually, depending on the lender and your credit profile. In contrast, LAMF interest rates typically range between 11% and 12% annually, making it a more cost-effective borrowing option.
Who can apply for a loan against mutual funds?
Anyone who owns mutual fund units can apply for a Loan Against Mutual Funds, provided they meet the lender’s eligibility criteria. Typically, this includes individuals with a minimum age of 18 years, a valid KYC record, and ownership of mutual funds with a certain value. The amount you can borrow depends on the value of your pledged mutual fund units, and the loan is subject to the lender's assessment of your mutual fund holdings and the loan-to-value ratio.
How much loan can you get against mutual funds?
The amount of loan you can get against mutual funds depends on the Loan-to-Value (LTV) ratio set by the lender. It is the ratio between the amount of loan you can borrow and the current market value of the mutual funds you pledge as collateral. The exact loan amount may vary based on the LTV ratio, the type of mutual funds you hold, the lender's policies, and your overall financial profile. Normally for any equity Funds Loan value ranges from 40 to 50% and or Debt mutual funds up to 90%.
Conclusion
A loan against mutual funds emerges as a smart financial tool that lets you access quick funds while keeping your investments intact. With benefits like lower interest rates, minimal documentation, and quick processing, it offers a practical solution for various financial needs.
By choosing LAMF, you're not just getting access to funds; you're making a strategic choice that keeps your investment journey uninterrupted. While it's an attractive option, remember to evaluate your repayment capacity and use this facility wisely to maintain your financial health.
Disclaimer- "Mutual Fund investments are subject to market risks, read all scheme related documents carefully."