Can You Get a Loan Against Mutual Funds in India?
Loans often get a bad reputation.
But when managed responsibly, these loans could be a great financial instrument to manage your expenses and keep your finances in check.
Now, of course, loan types have evolved quite a bit over the last few years.
Loans on mutual funds are one of these types of loans.
So how can you borrow a loan on mutual funds? And how good of an idea is it really?
Let’s find out.
What matters the most in mutual fund loans?
Mutual fund loan advantages are countless.
And even though plenty of institutions and lenders can promise you loans against mutual funds, it’s always advisable to weigh your options before deciding which platform to go with.
Here’s what you can evaluate about a mutual fund loan lender platform:
Important Read: Loan on Mutual Funds: Everything You Should Know
1. The credibility of the lender
Loans are such a turf that requires you to be careful.
Now even though most mutual fund loan platforms do the same job, every platform has certain features that distinguish it from the rest.
Make sure you’re verifying the following things:
- Research the lender online: Visit the official website of the lender and gather information about their history, products offered, and reviews.
- Check Regulatory Compliance: Ensure that your lender is registered and authorized to operate as a financial institution in India.
2. The convenience of the loan
Since mutual fund loans are processed by keeping your mutual fund units as collateral, most times, the loan could be processed online.
Plus, the borrowing of the loan should be easy without having to hop from website to website and giving your information to different vendors.
Also since you’re borrowing a loan against your mutual fund portfolio (which is used as collateral), you can expect your loan processing to be done online only.
The more convenient your loan processing is, the more preferable a lending institution becomes for a potential customer.
3. The support offered
Not just a mutual fund loan lender but any kind of financial institution could be evaluated on the basis of how easy it is to get in contact with them.
Ensure that the lender has a physical presence such as branch offices or registered addresses that can be verified.
Verify the lender’s contact information including phone numbers, email addresses, and customer support channels.
Legitimate lenders should have responsive customer service and provide clear communication channels.
4. Interest Rate
Depending on platform to platform, lender to lender, the interest rate of your loan may vary.
In India, an interest rate of anywhere between 10% to 12% is ideal.
This type of interest rate could very well complement your long-term as well as short-term investment plans.
Even at 50Fin, you can borrow a loan against your mutual fund units at an interest rate of just 10.5% p.a.
Eligibility process for loans against mutual funds
Every lending institution that you approach for a mutual fund loan will have eligibility criteria that you are required to fall under before you can borrow a loan.
Important Read: Eligibility for personal loan against mutual funds
Here are some of the most important ones:
1. A portfolio with a minimum value
Not every portfolio is eligible for a loan.
Every lender has a minimum asset value that your portfolio should have in order to apply for the loan.
At 50Fin, you need to have a minimum portfolio value of Rs 50,000 in order to apply for a mutual fund loan.
2. Portfolio ownership
In certain cases, a mutual fund portfolio isn’t allocated to the name of the holder.
Sometimes, a parent could be managing a portfolio for their child.
No matter the value of the portfolio in such cases, you can only borrow a loan under your name and complete ownership of the portfolio.
The borrower must be the owner of the mutual fund units pledged as collateral.
Joint holders may also be eligible, subject to the lender’s policies.
3. Loan-to-value Ratio
The LTV ratio determines how much loan amount can be borrowed against your mutual fund portfolio.
Different lenders offer varying loan-to-value (LTV) ratios. Most times, it’s between 50 and 80 percent.
Higher LTV ratios may be offered for funds with lower volatility and higher liquidity.
For example, if your mutual fund has a value of ₹20 lakhs and the LTV ratio is 50%, you can avail a loan of up to ₹10 lakhs.
4. Documentation
Every lender has specific requirements in terms of documentation to process the loan.
However, since your mutual fund portfolio is used as collateral, most (if not all) of the documentation is done without any physical paperwork.
Documentation also includes PAN verification and pledging your mutual fund portfolio.
What should you consider?
Every loan process consists of certain terms and conditions that you very well need to be aware of.
Here’s what you should be aware of:
1. Market Risk
As the loan you borrow is against your mutual fund units, any major market fluctuations could impact the value of your collateral.
In the event of a significant decline in the NAV of the pledged funds, you may be required to provide additional collateral or repay a portion of the loan to maintain the required LTV ratio.
2. Impact on Investment Returns
As you pledge your mutual funds portfolio and borrow a loan against it, it goes into a lock-in period till your loan tenure is complete.
This means that your ability to modify your portfolio is also restricted.
Since the pledged units cannot be redeemed or switched until the loan is repaid, you may miss out on investment gains during the loan tenure.
3. Default Risk
Failing to repay the loan as per the agreed-upon terms will also lead to defaults.
This further leads to consequences such as penalties, legal action, and risk of margin calls.
Ensure that you have a repayment plan in place and adhere to it diligently.
Borrow a loan against mutual funds with 50Fin
For those seeking immediate liquidity without liquidating their portfolio, a loan against mutual funds is one of the best options.
By pledging mutual fund units as collateral, you can quickly borrow funds at competitive interest rates and enjoy flexible repayment options.
And what better way to borrow against your mutual fund units than choosing a platform that approves your loan request within 7 minutes, disburses loans within 4 working hours, and has an interest rate of just 10.5% p.a.?
Yup, we’re talking about 50Fin.
Apply for a loan against mutual funds with 50Fin and start benefiting from your MF portfolio in different ways.
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