Know the basic rules of loan against Mutual funds

Mutual funds are one of the most liquid investment options that can be sold easily to meet your immediate financial needs.

Alternatively, you can consider the option of claiming a loan against your mutual fund investments; you don’t have to sell your units in a haste. Interest rates on loan against MF is lower than personal loan rates.

Banks and other financial institutions offer loan against all MF categories including equity, debt and hybrid MFs, provided the funds have completed the minimum lock-in period. For instance, tax savings MFs have a lock-in period of three years, and retirement plans have a lock-in period of five years.

Loans are also offered against exchange-traded funds (ETFs) and fixed maturity plans (FMPs).

Ankur Choudary, co-founder and Chief Investment Officer of Goalwise.com, says: “One of the advantages of claiming such loans is that, if you have any ongoing SIP (systematic investment plan) towards long-term goals, it can continue without any disruption.” The loan amount would depend on the net asset value (NAV) of the units held by the individual. However, the minimum loan amount varies with each bank and NBFC. Most lenders offer up to 50 per cent of the value of your equity fund holdings as loans.

In the case of debt funds, loans are usually offered up to 80 per cent of the value of the units held. The loan amount varies with institutions.

For instance, the minimum loan amount offered by HDFC Bank against mutual funds is ₹50,000. In the case of SBI, it is ₹25,000. The maximum loan amount SBI offers against equity, hybrid and ETF mutual funds is ₹20 lakh, and the maximum loan offered against debt MFs and FMPsis ₹5 crore.

Since loan against MFs works in a fashion similar to an overdraft facility — borrowers can make repayments according to their liquidity positions.

As MFs are market-linked investments, borrowers should be mindful of the fluctuations in the value of the pledged units.

Naveen Kukreja, CEO and co-founder, Paisabazaar.com, says: “While an appreciation in the value of pledged mutual funds increases the drawing power of the borrower, a breach of LTV (loan-to-value) ratio due to a decrease in the market value of the pledged mutual funds will have to be made good by the borrower.”

Interest and other charges

The interest rate for loan against MFs varies between 10 per cent and 11 per cent per annum, while interest on personal loan can be up to 24 per cent per annum.

For instance, SBI’s interest for loan against MF works out to 10.4 per cent, while the same on personal loan goes up to 14.9 per cent.

Loan against MFs attract charges such as processing fee and annual maintenance. For instance, Axis Bank charges 0.15 per cent of the loan amount or ₹ 1,000, whichever is higher, as processing fee. Bajaj Finserv levies 0.1-1 per cent of the loan amount as processing fee.

Note that the processing fee varies if you apply for the loan online. Bajaj Finserv charges 0.1 per cent of loan amount if loan is availed online.

For HDFC Bank, in case of online loan, the processing fee is up to ₹1,499; for offline loan, the processing fee is up to 1 per cent of the loan amount (a minimum of ₹3,500).

Documentation

For any bank or financial institutions to consider your loan request, you need to pledge your MF units as security. You can go for the loan through online or offline options.

Players such as HDFC Bank have made the entire process online and paperless. All you have to do is fill up the application form and provide details related to your mutual funds.

The disbursal of loan may take a few working days in case offline processing.

Usually, lenders have an approved list of mutual funds against which loan is available. While the list is usually quite exhaustive, it pays to check if the MF units you may want to pledge are in this list.