Purchasing a loan against Mutual Funds (MF) is a convenient option to acquire some immediate funds. Such a loan gives you a benefit of not redeeming your MF units prematurely. Also, such loans don’t impact Systematic Investment Plans (SIP) in any way. MF loan is very similar to having an overdraft facility on your current account.
These loans are offered by all banks and NBFCs on two types of MFs - Equity and Hybrid Funds. Hybrid Funds are a collective investment of various classes of assets. Some Hybrid Funds have a higher allocation to Equity, and their lower proportion goes to Debt. If you pledge Hybrid Funds, your risks would be minimized, as it is a diversified investment instrument.
Signing a Lien
When you purchase a sum assured against MF, you sign a lien with your lending institution. Under this lien, you agree to the terms by the lender that it owns the rights to sell fund units off, or hold them. Hence, you are guaranteeing co-ownership of these fund units to the lender. All the owners who are in possession of these MFs, need to sign this document.
However, this doesn’t mean you are transferring your rights to them. You can still be able to earn the returns on investing in MFs depending on the market fluctuations. Lenders set specific margins and limits for Equity Mutual Funds and fixed income fund units.
However, you can ask to remove the lien once the loan is repaid. Additionally, if you have partially repaid the loan, partial removal of lien is also possible.
How to Avail a Loan Against Mutual Fund
You can approach any bank or NBFC like Bajaj Finserv to avail such a loan against Mutual funds. For purchasing it, you would have to pledge some units of Mutual Funds to the lending institution. The MFs work as collateral for the bank and sum assured is a percentage of the total value you have pledged. It also depends on the tenor for which you want to use this loan.
NBFCs also offer Loan Against Shares (LAS) of amounts up to Rs. 100 Crore for any individual who is salaried or self-employed with a regular source of income. Bajaj Finserv offers attractive interest rates on LAS, which enables you to fund your dream purchases without much burden.
Loan against MFs can be repaid easily with an attractive interest rate. Since it is a secured loan, lenders keep it as collateral in case there is a failure in repaying it back on time. Also, even if you have a lower credit score, you are eligible to borrow this loan.
Banks and NBFCs have tied up with the mutual fund registrar for offering the facilities of loans to the borrowers. Borrowers must have online access to their MF account on the online portal of MF registrar. When you log in to the account, a list of all the fund units you own will be displayed with their current market values.
You can select the ones that you want to pledge by meeting the eligibility criteria of loan against mutual funds which is set by the lenders. When you qualify for purchasing a loan, you can open a current account which will provide you with an overdraft facility. The lien that you have signed will be based on these fund units which you have chosen.
Many online platforms offer the facility of quick sanctioning of loans if your fund units are in a demat account and you have the permission to use them for pledging. If your MF units are in a physical form, you can approach the insurer, bank or NBFC to sign a loan agreement.