Exploring the Smart Way to Borrow: Loan Against Mutual Funds

When financial needs arise, most people consider options like personal loans or credit cards. However, these often come with high interest rates and rigid repayment terms. An increasingly popular alternative for investors is the Loan Against Mutual Funds (LAMF), which allows you to borrow against your existing investments while continuing to grow your wealth.

How Does Loan Against Mutual Funds Work?

A Loan against Mutual Funds lets you use your mutual fund holdings as collateral to obtain a secured loan from banks or NBFCs. This allows you to access funds without redeeming your investments, which can be particularly useful during market downturns when selling units would mean a loss.

Once you pledge the mutual fund units, a lien is marked in favor of the lender. The loan amount depends on the type and value of the funds pledged—debt funds generally offer higher loan percentages (up to 80%), while equity funds might fetch 50-60%.

Why Choose This Loan?

• Non-intrusive: Your mutual fund portfolio stays intact.

• Lower Interest: Since the loan is backed by assets, interest rates are considerably lower than unsecured loans.

• Faster Approvals: With fewer documents and online processes, approval is quick and convenient.

Who Offers This Facility?

Most leading banks and financial institutions provide loans against mutual funds. Some fintech platforms even offer 100% digital processing. Eligibility criteria and interest rates vary, so it's worth comparing offers before deciding.

Things to Keep in Mind

• NAV Sensitivity: The loan value and risk are directly tied to fund performance. A steep market correction may impact your loan eligibility or lead to a margin call.

• Fund Type: Equity funds carry higher risk and may be accepted at a lower loan-to-value ratio.

• Repayment: Options include overdraft facilities or term loans, depending on your cash flow needs.

Documentation Required

Typically, the documentation is minimal and includes:

• PAN Card

• Mutual Fund statement

• KYC documents

• Loan application form

Some platforms also integrate directly with asset management companies, allowing paperless processing.

Common Scenarios Where LAMF Helps

• Entrepreneurs needing short-term working capital.

• Individuals with a sudden need for liquidity.

• Parents funding higher education or marriage expenses.

Tax Advantage

An added advantage of this loan type is the absence of tax liabilities at the time of borrowing, as there is no need to sell mutual fund units. This makes it more tax-efficient than withdrawing investments.

Conclusion

Loan against mutual funds is a strategic financial tool for investors who seek liquidity without compromising their investment growth. With flexible repayment options, competitive rates, and fast processing, it stands out as a compelling borrowing option. However, it’s important to assess the risk and stay updated with market trends when opting for such loans.