Mutual funds are one of the most popular investment vehicles in India and around the world. They offer diversification, professional management, and long-term wealth creation. But did you know that your mutual fund holdings can also serve as collateral for a loan?
A Loan Against Mutual Funds (LAMF) is a smart way to unlock liquidity without redeeming your investments. Whether you need short-term funds for a medical emergency, business needs, or personal expenses, LAMF is a low-risk, cost-effective option.
However, just like any financial product, it’s important to understand how it works and how to make the most of it. Here are the best tips for taking a loan against mutual funds:
1. Understand What Types of Mutual Funds are Eligible
Not all mutual funds qualify as collateral. Generally, debt mutual funds and equity mutual funds can be pledged for a loan, but the treatment differs:
- Debt Mutual Funds usually offer a higher loan-to-value (LTV) ratio (up to 80-85%).
- Equity Mutual Funds have a lower LTV ratio (typically 50-60%) due to their market volatility.
Check with your lender on which funds they accept and what LTV they offer.
2. Compare Interest Rates and Terms
One of the biggest advantages of a loan against mutual funds is that interest rates are generally lower than unsecured personal loans. However, rates may vary across banks and NBFCs. Typically, the interest rate ranges from 9% to 13% per annum, depending on the type of fund and lender.
Also, check for:
- Processing fees
- Prepayment charges
- Tenure flexibility
Use loan calculators to understand your monthly obligation.
3. Choose the Right Lender
Not all lenders offer loans against mutual funds, and even among those who do, terms and services can differ significantly. Banks like HDFC, ICICI, Axis, and NBFCs like Bajaj Finserv, and some fintech platforms offer this facility.
Choose a lender that offers:
- Quick processing
- Digital pledge and disbursal
- Low fees and charges
- Easy repayment options
Some platforms also allow overdraft-style lending, where you only pay interest on the amount you use.
4. Maintain a Healthy Portfolio Value
Since the loan is secured against your mutual funds, any major drop in fund value can affect your loan. If the portfolio value drops significantly, the lender may issue a margin call, asking you to either pledge more units or repay part of the loan.
To avoid such surprises:
- Avoid pledging highly volatile funds.
- Monitor the market and fund performance regularly.
- Be prepared with backup funds in case of a sudden downturn.
5. Avoid Redeeming Pledged Units
Once you pledge mutual fund units, they are marked as lien and cannot be redeemed until the loan is fully repaid and the lien is removed. Therefore, only pledge those units that you don’t plan to use or redeem in the near future.
6. Understand the Tax Implications
A loan against mutual funds is not considered taxable income, so you don’t need to worry about tax on the amount received. However, interest paid is not eligible for any tax deduction (unlike home loan interest). Be mindful of this while calculating the cost of borrowing.
7. Use the Funds Wisely
LAMF is best used for short-term liquidity needs. Don’t take such a loan to invest in the stock market or other high-risk ventures. Use it to manage temporary cash flow issues or emergencies where liquidating your mutual funds is not ideal.
Final Thoughts
A loan against mutual funds is a great tool to leverage your investments without disturbing your long-term goals. It combines the flexibility of a personal loan with the advantage of lower interest rates and quick access to funds. By keeping the above tips in mind, you can make smart borrowing decisions and maintain financial stability.
