How To Take Loan Against Mutual Fund: Expert Advice, Eligibility, and Required Documents

Mutual funds are among the most popular investment options, providing investors the opportunity to build wealth over time with small, consistent contributions. Whether you are saving for retirement, a child’s education, or any long-term financial goal, mutual funds allow you to grow your money steadily. But, sometimes, unexpected financial emergencies arise, and you may need to access funds quickly. Instead of selling your mutual fund units and potentially disrupting your long-term investment goals, you can opt for a loan against your mutual fund investment.

This article provides a comprehensive guide on how to take a loan against mutual funds, including expert advice on eligibility, loan amount, interest rates, and required documents.

What is a Loan Against Mutual Fund?

A loan against mutual funds allows you to use your mutual fund units as collateral to borrow funds from financial institutions or banks. The amount you can borrow depends on the type of mutual funds you hold (equity or fixed income) and your eligibility.

Taking a loan against mutual funds is a smart way to meet your short-term liquidity needs while keeping your investments intact. By choosing this option, you avoid selling your mutual fund units and benefit from continued growth in your investment.

Eligibility Criteria for a Loan Against Mutual Fund

Not everyone can avail a loan against their mutual fund units. Here’s what you need to know about the eligibility criteria:

1. Individual Investors: Any adult individual who holds mutual fund units is eligible to apply for a loan against them.

2. NRIs: Non-Resident Indians (NRIs) are eligible for loans against mutual funds, provided they meet the eligibility requirements set by the lender.

3. Hindu Undivided Families (HUF): HUFs, which are common in India, can also pledge their mutual funds to take a loan.

4. Trusts and Corporations: Businesses, trusts, and other corporate bodies holding mutual funds can also apply for loans against their mutual fund investments.

5. Minors: Loans against mutual funds are not available for minors, as they cannot legally enter into financial contracts.

The loan amount you can get depends on several factors, such as your credit score, the type of mutual funds you hold, and the lender’s policies. A higher credit score generally helps in securing a loan at a more favorable interest rate.

Loan Amount for Mutual Fund Collateral

The loan amount you can borrow against your mutual fund units is determined by the Net Asset Value (NAV) of your mutual fund. The loan amount typically varies based on the type of mutual funds you hold:

• Equity Mutual Funds: If you have equity mutual funds, the loan amount can be up to 50% of the NAV.

• Fixed Income Mutual Funds: Loans against fixed-income mutual funds tend to offer a higher percentage of the NAV, with loans up to 70-80% of the NAV.

The exact loan amount depends on the mutual fund scheme and the lender’s policies. You can approach a bank or a financing institution to discuss the available loan options against your mutual fund holdings.

Interest Rates on Loans Against Mutual Funds

One of the primary reasons to take a loan against your mutual fund units is the lower interest rate compared to personal loans. Since mutual fund units serve as collateral, the risk for the lender is lower, and as a result, they offer loans at competitive rates.

Typically, the interest rates for loans against mutual funds range from 10% to 12% per annum, which is significantly lower than the rates for personal loans, which can go as high as 15% to 20%.

Additionally, processing fees and foreclosure charges are often reduced or waived by most lenders when you opt for a loan against mutual funds, making it an attractive option for those looking for quick liquidity.

Required Documents for a Loan Against Mutual Fund

When you apply for a loan against mutual funds, you'll need to provide several documents. These documents ensure that the lender has a clear picture of your financial standing and mutual fund holdings. Here is a list of common documents required:

1. KYC Documents: Identity proof (Aadhaar card, PAN card), address proof (utility bills, passport), and photographs.

2. Proof of Mutual Fund Holdings: You need to submit a statement or a certificate showing the mutual fund units you hold, which will be used as collateral.

3. Income Proof: Banks or financial institutions usually ask for your income details to assess your ability to repay the loan. This can include salary slips, bank statements, or business income statements (if applicable).

4. Credit Score Report: Lenders may check your credit score to assess your financial responsibility. A higher credit score increases your chances of getting a loan at a lower interest rate.

5. Loan Application Form: This includes details such as the loan amount, the mutual funds being pledged, and personal information.

6. Bank Account Details: For disbursing the loan, you will need to provide your bank account number and other related details.

Once you have these documents ready, you can approach your lender or bank for the loan application process. The approval process usually takes a few days, depending on the lender’s

Advantages of Taking a Loan Against Mutual Fund

Taking a loan against your mutual fund units offers several advantages:

1. Retain Your Investment: The biggest advantage is that you do not have to sell your mutual funds. Your investment continues to grow while you access the liquidity you need.

2. Lower Interest Rates: Loans against mutual funds offer more affordable interest rates than personal loans or credit card debt.

3. Quick Processing: Loans against mutual funds are typically processed faster than traditional loans, as the collateral is already in place.

4. Flexibility: You can use the loan for any purpose, whether for personal emergencies, business needs, or other financial goals.

5. Tax Benefits: The interest paid on loans against mutual funds may be tax-deductible if used for business or investment purposes.

If you have invested in mutual funds and find yourself in need of urgent funds, taking a loan against your mutual fund units can be a great alternative to selling your investment. This option not only provides you with quick liquidity but also ensures that your investments remain intact and continue to grow over time.

Before applying for a loan, make sure you check the eligibility criteria, required documents, and the interest rate offered by various lenders. Additionally, it’s important to ensure that you can repay the loan within the agreed timeframe to avoid any issues with the collateral.

With expert advice and a clear understanding of the process, taking a loan against your mutual fund can be a smart financial move to tide over short-term financial needs while securing your long-term financial goals.