Individual investors, NRIs, firms, HUFs, trusts, companies and any entities can avail loan against mutual fund investments. Minors are not eligible. Quantum of loan, tenure and interest rate are determined by the bank/financing institution on the basis of various factors as well as the credit score of the applicant.
MF investors typically invest for medium to long term goals. Faced with a sudden need for funds, investors tend to redeem investments. However, this interrupts the road to fulfilling goals. They should instead consider a loan against investments. Here the investment remains intact as the loan is availed by marking a lien against mutual fund units.
Eligibility
Individual investors, NRIs, firms, HUFs, trusts, companies and any entities can avail loan against mutual fund investments. Minors are not eligible. Quantum of loan, tenure and interest rate are determined by the bank/financing institution on the basis of various factors as well as the credit score of the applicant. A higher credit score may help the applicant to negotiate for a lower interest rate.
How much loan can be availed?
In case of equity MFs, loan can be availed up to 50% of the net asset value. In case of fixed income mutual funds, one can avail loan to the tune of 70–80% of net asset value.
Process
To avail loan against mutual funds, the investor can approach the financing institution or bank and apply for the same. Many finance companies also provide online applications that facilitate the entire process online and give approval instantly. Lien marking of units is also done online through the mutual fund registrar’s records.
Costs
Rate of interest for loan against mutual funds is on the lower side as compared to a personal loan as there is a collateral. Processing fees or foreclosure fees are minimal or waived off.
Points to note
- If partial loan has been repaid, that proportion of mutual fund units may be made free from lien.
- Mutual fund investments continue to earn dividends and appreciate while the lien is marked.
- Once lien is marked in favour of the bank/financial institution, these units cannot be redeemed by the investor.
