For a better experience, Read this story in our App
TO ENJOY ADDITIONAL BENEFITS
Connect With Us
Get BusinessLine apps on
Loan against Mutual Funds (LAMF) allows investors to leverage their existing mutual fund (MF) investments for meeting personal requirements or short-term cash-flow mismatches.
Just like personal loans, lenders do not impose any end-usage restrictions on LAMF proceeds, which makes it an excellent alternative for those unable to avail unsecured loans. Here, I will discuss some other LAMF features that borrowers should be aware of before applying for it.
List of approved securities and their LTV (loan to value) ratios can vary. Most lenders maintain a list of mutual funds eligible for availing LAMF. The LTV ratios for these funds vary depending on their asset class and are subject to the regulatory caps on LTV ratios set by the RBI. According to the Reserve Bank of India (RBI) regulations, banks are free to set the LTV ratios for loan against debt funds as per their loan policies.
In case of equity-oriented mutual funds, while the regulatory cap on LTV ratios is 75%, banks usually offer LTV ratios of up to 60% depending on their credit-risk assessment of those funds.
Moreover, the list of eligible mutual funds can also vary across banks and NBFCs depending on their credit risk policies. Thus, while comparing LAMF options, borrowers should first find out whether their mutual fund(s) are eligible for availing LAMF and then, compare the LTV ratios assigned to the mutual funds by various lenders.
LAMF is usually offered in the form of overdraft facility wherein the credit limit is sanctioned on the basis of LTV ratio and market valuations of the pledged securities. The borrowers can withdraw the entire sanctioned limit or a part of it as per their financial requirements.
They can also draw from their sanctioned limits in tranches for any number of times and similarly make repayments till the expiry of their overdraft tenures. The interest component is charged only on the withdrawn amount until its repayment. These flexibilities makes LAMF an excellent financing facility for MF investors to meet their short-term cash-flow mismatches without compromising on their long-term financial goals.
Investors availing LAMF facilities usually need to service their incurred interest amount every month. Being an overdraft facility, borrowers have the flexibility to repay the principal component, in part or in full, as per their convenience and without incurring any prepayment charges. Thus, the absence of prepayment charges and EMI burden in LAMF provides greater flexibility to the borrowers in managing repayment obligations as per their cash flows.
Being invested in market-linked securities, NAVs of mutual funds are prone to varying degrees of volatility depending on their asset class(es). This leads lenders to revalue the pledged mutual funds at periodical intervals. Lenders may also conduct interim revaluation during steep market corrections or bearish phases. As the credit limit in LAMF is primarily determined on the basis of the NAVs of pledged mutual funds, any sharp fall in the value of the pledged mutual funds may lead the current LTV ratio to exceed the original ratio. In such a situations, lenders may ask LAMF borrowers to pledge more securities or make cash/cheque payments to bring back their LTV ratio to the required levels. Failing to do so may lead lenders to levy penal charges or even liquidate the pledged securities.
Lenders factor in the credit scores of their loan applicants, especially in case of unsecured loan options, to assess their creditworthiness. As the lenders have the option to redeem the pledged MFs in case of repayment defaults or delays, they usually take a more relaxed approach while evaluating LAMF applicants having low credit scores. However, some lenders may still consider the credit scores of their LAMF applicants while setting their interest rates.
Borrowers can also draw from sanctioned limits in tranches for any number of times and similarly, make repayments till the expiry of their overdraft tenures. The absence of prepayment charges and EMI burden provides greater flexibility to the borrowers in managing repayment obligations as per their cash flows
(The writer is chief business officer, secured loans, Paisabazaar)
Published on December 23, 2024
Comments
Comments have to be in English, and in full sentences. They cannot be abusive or personal. Please abide by our community guidelines for posting your comments.
We have migrated to a new commenting platform. If you are already a registered user of TheHindu Businessline and logged in, you may continue to engage with our articles. If you do not have an account please register and login to post comments. Users can access their older comments by logging into their accounts on Vuukle.