Many investors today rely on mutual funds for long-term wealth creation. But there are times when you need liquidity before your mutual fund schemes mature. Instead of opting for high-cost credit like personal loans or credit cards, you can choose a loan against mutual fund (LAMF). This option allows you to pledge your mutual fund units as collateral and get a loan without selling your investments. With lower interest rates and flexible repayment options, a loan against mutual fund is becoming one of the most practical ways to meet short-term financial needs while keeping your financial goals on track.
In this article, we will explore how loan against mutual funds works, its benefits compared to a personal loan, how mutual fund investors can avail such loans, and the important terms and conditions to know before applying.
Understanding Mutual Funds and Their Role in Investment
A mutual fund is a pooled investment vehicle where money is collected from various investors and invested in a type of mutual holdings like equities, bonds, or a combination of both. For mutual fund investors, these funds provide access to professional management, diversification, and an opportunity to achieve long-term financial goals.
There are different categories such as equity mutual funds, equity fund schemes, and debt funds. While equity mutual funds are ideal for wealth creation, debt funds are more stable. Together, they help mutual fund investors balance risk and return in their investment portfolio.
When unexpected expenses arise, instead of liquidating or redeeming mutual fund units, you can use them to borrow money through a loan against mutual fund. This way, you can access funds without selling their mutual funds, maintaining ownership of your fund holdings.
Loan Against Mutual Fund as a Secured Loan
A loan against mutual fund is essentially a secured loan where you pledge mutual fund units to the lender in exchange for a loan amount. Since the loan is secured, the interest rate is generally lower compared to personal loans or other unsecured loans.
The process involves the lender placing a lien is marked on the pledged units. Once the lien is marked, the loan amount is disbursed directly to your account. This is a kind of loan that allows you to get a loan against mutual holdings while you continue to stay invested.
It’s a smart way to get quick access to funds because it allows investors to access funds while retaining ownership of their investments. This also means that you can still benefit from better returns if your fund value grows during the loan period.
Advantages of Loan Against Mutual Fund Compared to Personal Loans
A major advantage of a loan against mutual fund is that the loan interest rate is lower compared to personal loans. Since it’s a secured loan, the interest rate is based on your mutual fund holdings, not just your credit score.
Unlike a personal loan, where you need to liquidate or redeem assets to cover costs, loan against mutual fund helps you access funds without selling your investments. This protects your long-term financial goals.
Additionally, lenders typically provide a loan amount that’s a percentage of your mutual fund units’ value. This helps you manage funds without selling their mutual funds, and you only need to pay interest on the part of the loan you use.
How to Avail Loan Against Mutual Fund
To avail a loan against mutual fund, you need to approach a lender who offers this facility. Many banks and NBFCs in India have an approved list of mutual funds eligible for pledging.
You can apply online, select the mutual fund units as collateral, and mark a lien electronically. Once your pledged mutual funds are approved, the loan amount is disbursed quickly. This makes it one of the easiest ways to borrow money when in need.
LAMF products often function like an overdraft account. You can withdraw as needed, and interest is charged only on the withdrawn amount. This feature makes LAMF flexible compared to traditional loans.
Loan Amount and Collateral Requirements
The loan amount you can get depends on the value of your mutual fund investments. Typically, lenders offer 50–70% of the fund value for equity funds and a higher percentage for debt funds or debt mutual funds.
When you pledge your mutual fund units, the lender retains the right to sell the pledged units if you fail to repay the loan. Therefore, maintaining timely repayments is crucial.
If the market declines, you may face a margin call, requiring you to either top up the collateral or allow the lender the right to sell the pledged units. This ensures the lender can recover the outstanding loan.
Interest Rate and Loan Tenure
The loan interest rate for loan against mutual fund is usually lower compared to personal loans because of its secured nature. The rate of interest varies depending on the lender, the type of fund (equity funds or debt funds), and market conditions.
The loan tenure may range from a few months to a few years. During the loan duration, you typically need to pay interest regularly, and principal repayment can be flexible. Some lenders offer an overdraft facility where interest only on the amount used is charged.
Choosing the right loan period ensures that your loan EMIs remain affordable while meeting your short-term financial needs.
Redeeming vs Pledging Mutual Fund Units
Investors often face the choice of whether to redeem their mutual fund units or pledge mutual funds to take a loan. While redemption provides immediate cash, it disrupts your investment and may attract taxes.
By contrast, pledging lets you access funds without selling. This means you can continue to invest in mutual funds and stay aligned with your long-term financial goals.
If you choose to redeem, you may miss out on potential growth, especially especially equity funds. Pledging is therefore a smart way to handle emergencies without compromising your mutual fund investments.
Risks and Terms and Conditions
Every loan against mutual fund comes with terms and conditions that investors must carefully read. For example, lenders retain the right to sell pledged units in case of default.
Another risk is a margin call. If the fund value drops, you may need to add more mutual fund units as collateral. Otherwise, the lender can sell the pledged units.
Understanding these terms and conditions ensures you don’t face unexpected surprises. Always evaluate your ability to repay the loan before opting for this kind of loan.
Comparing Loan Against Mutual Fund with Personal Loans
While personal loans are widely available, they are unsecured loans and come with higher loan interest rates. A loan against mutual fund offers lower interest rates, flexibility, and the ability to access funds while retaining ownership of your investments.
Unlike take a personal loan, where your loan EMI is fixed and often higher, a LAMF can function as an overdraft, making it easier to manage cash flows.
For mutual fund investors, choosing to get a loan against their funds is a practical alternative to selling assets or opting for high-cost loans.
When to Consider Loan Against Mutual Fund
A loan against mutual fund is ideal for short-term financial needs, emergency expenses, or business requirements. It allows investors to allow investors to access funds quickly while staying invested in the market.
This option is particularly useful when you don’t want to liquidate your investments or disrupt long-term financial goals. It’s also suitable for those who want funds quickly at a loan interest rate that’s lower compared to personal loans.
However, it should not be seen as a personal loan to invest or for speculative purposes like investing or trading.
Conclusion: Loan Against Mutual Fund as a Practical Option
A loan against mutual fund is one of the most efficient ways for mutual fund investors to meet urgent expenses while keeping their investments intact. With lower loan interest rates, flexible repayment, and continued growth potential of your funds, this is a smart way to bridge financial gaps.
Key Takeaways
- A loan against mutual fund is a secured loan where you pledge mutual fund units.
- Interest rates are lower compared to personal loans, making it cost-effective.
- It allows you to access funds without selling their mutual funds, protecting your long-term financial goals.
- The lender retains the right to sell the pledged units if you fail to repay the loan.
- Risks include margin calls if the fund value drops.
- Compared to personal loans, LAMF offers flexibility like an overdraft facility.
- Always check the terms and conditions before you avail a loan.
- Best suited for short-term financial needs and emergencies, not for speculative use.