Mutual funds are not just a great way to grow your wealth—they can also be a valuable financial resource in times of need. Did you know you can secure a loan against your mutual fund investments without liquidating them? A loan against mutual funds (LAMF) allows you to unlock the potential of your investments while keeping them intact.
In this article, we’ll dive deep into the benefits, the process, and the key considerations when opting for a loan against mutual funds. For more expert insights on personal finance and investments, visit RichPath.in—your trusted guide to financial empowerment.
What is a Loan Against Mutual Funds?
A loan against mutual funds is a type of secured loan where your mutual fund units act as collateral. Instead of selling your investments in times of financial need, you can pledge them to a bank or financial institution and borrow money.
This option is especially beneficial because your investments continue to grow, earning returns while providing you with liquidity.
Benefits of Loan Against Mutual Funds
1. Retain Ownership of Investments
- Your mutual fund units remain in your name, and you continue earning dividends or capital appreciation.
2. Lower Interest Rates
- Compared to personal loans, loans against mutual funds have lower interest rates since they are secured.
Example:
- Interest rate for personal loan: 12-15%
- Interest rate for loan against mutual funds: 9-12%
3. Quick and Hassle-Free Process
- The application process is simple, with minimal documentation required.
4. Flexibility in Repayment
- Most lenders offer flexible repayment options, including paying only the interest during the loan tenure.
5. No Prepayment Penalties
- Many financial institutions do not charge penalties for prepayment of loans.
How to Get a Loan Against Mutual Funds
Here’s a step-by-step guide to the process:
Step 1: Approach a Bank or NBFC
Contact your bank or a non-banking financial company (NBFC) that offers loans against mutual funds. Popular providers in India include HDFC Bank, ICICI Bank, and Axis Bank.
Step 2: Submit an Application
Provide details of your mutual fund holdings and fill out the loan application form.
Step 3: Pledge Your Mutual Fund Units
- For physical units: Sign a lien agreement that grants the lender rights to your mutual fund units as collateral.
- For dematerialized units: Use platforms like CAMS or KARVY to pledge your units online.
Step 4: Approval and Disbursement
Once approved, the lender disburses the loan amount directly to your bank account.
Key Factors to Consider
1. Loan Amount
The loan amount depends on the value of your mutual fund units and the lender’s margin requirements.
Example:
If the current value of your mutual fund portfolio is ₹10 lakh, and the lender offers 50% as a loan, you can borrow up to ₹5 lakh.
2. Interest Rates
Interest rates for loans against mutual funds vary by lender and type of fund. Debt funds may attract lower rates than equity funds due to their lower risk.
Pro Tip: Compare rates from multiple lenders to secure the best deal.
3. Tenure
Most lenders offer a loan tenure ranging from 1 to 3 years.
4. Lien on Mutual Funds
The lien on your mutual fund units prevents you from redeeming them until the loan is fully repaid.
5. Risk of Market Volatility
If the value of your pledged units drops significantly due to market volatility, the lender may ask for additional collateral or partial repayment.
Practical Example: Ramesh’s Story
Ramesh, a small business owner, needed ₹5 lakh for an urgent medical expense. Instead of liquidating his mutual fund portfolio worth ₹12 lakh, he approached his bank for a loan against mutual funds.
- Loan Amount: ₹5 lakh (50% of portfolio value)
- Interest Rate: 10% per annum
- Monthly Interest: ₹4,166 (₹5,00,000 x 10% ÷ 12)
By opting for this loan, Ramesh retained his investments, which grew in value by 8% over the year, helping him recover financially without compromising his long-term goals.
Loan Against Mutual Funds vs. Personal Loan
| Feature | Loan Against Mutual Funds | Personal Loan |
|---|---|---|
| Collateral Required | Yes (mutual fund units) | No |
| Interest Rate | Lower (9-12%) | Higher (12-15%) |
| Loan Amount | Based on mutual fund value | Based on income and credit score |
| Approval Time | Quick (minimal documentation) | Moderate |
| Impact on Investments | Investments remain intact | Not applicable |
Tax Implications of Loan Against Mutual Funds
- No Tax Benefits
- Interest paid on the loan is not tax-deductible, unlike home loans or education loans.
- Capital Gains Tax
- If you default on the loan and the lender sells your units, you may incur capital gains tax.
Popular Lenders Offering Loans Against Mutual Funds
Here are some top banks and NBFCs in India that provide loans against mutual funds:
- HDFC Bank: Offers competitive interest rates and flexible repayment options.
- ICICI Bank: Provides online lien marking for seamless transactions.
- Axis Bank: Covers a wide range of mutual fund schemes.
Tips for Choosing the Right Loan
- Check Eligibility: Ensure the lender accepts your mutual fund scheme as collateral.
- Compare Interest Rates: Use platforms like BankBazaar or PaisaBazaar for comparisons.
- Understand Terms and Conditions: Read the fine print to avoid surprises.
When to Consider a Loan Against Mutual Funds
- Short-Term Needs: Ideal for short-term financial requirements like medical emergencies or working capital.
- Avoiding Redemption: If you don’t want to disturb your long-term investment goals.
- Lower Interest Costs: When compared to personal loans or credit cards.
Common Myths About Loans Against Mutual Funds
1. It’s Complicated
With advancements in technology, the process is now simple and quick.
2. Only for Large Investors
Even small investors with a portfolio of ₹1-2 lakh can avail of this loan.
3. High Risk
The risk is manageable if you monitor your pledged investments regularly.
Conclusion: Unlock the Power of Your Investments
A loan against mutual funds is a smart way to handle financial emergencies without disrupting your investment portfolio. With benefits like lower interest rates, quick approvals, and flexible repayment options, it’s an excellent alternative to traditional loans.
For expert financial insights, visit Rich Path. and start your investment journey today! 🚀
Read more –
Top 5 Mutual Funds for Long-Term Growth in India in 2025
Best Mutual Funds: How to Choose – A Complete Guide
Best Flexi Cap Mutual Funds to Invest in 2025
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