Mutual funds are a popular long-term investment option, providing capital growth over time. However, when the need for liquidity arises, many investors prematurely redeem their holdings—often at the cost of potential future gains. Fortunately, there’s a better way to access funds while keeping your portfolio intact: availing a loan on mutual funds.
A loan against securities such as mutual funds allows investors to meet urgent financial needs without disrupting their long-term investment strategy. Whether it’s for education, medical expenses, or business requirements, this option can be an efficient, low-cost solution. Here’s how it works and how you can maximise its benefits.
What Is a Loan Against Mutual Funds?
A Loan Against Mutual Funds (LAMF) is a secured loan wherein you pledge your mutual fund units as collateral. The loan is usually structured as an overdraft facility, giving you flexible access to funds based on the value of your holdings.
You retain ownership of your mutual fund portfolio, which continues to earn returns, even as you access liquidity. It’s a smart option for investors who want to avoid liquidation and continue benefiting from potential capital appreciation.
Key Features of Loan on Mutual Funds
Several banks and financial institutions offer this facility. Leading banks like ICICI Bank provide an easy-to-access, fully digital loan against mutual fund option with the following benefits:
1. High Loan-to-Value Ratio
- For equity mutual funds, up to 50% of the Net Asset Value (NAV) can be availed.
- For debt mutual funds, the LTV goes up to 80% of NAV.
- The loan amount can go up to ₹20 lakh for equity mutual funds and ₹1 crore for debt mutual funds.
2. Overdraft Facility
Instead of a lump sum disbursement, the loan is offered as an overdraft account, giving you the freedom to withdraw only as much as you need. Interest is charged only on the utilised amount and only for the duration it is used—a major benefit over traditional loans.
3. No Liquidation Required
You don’t need to redeem or sell your investments. The pledged units remain in your demat or mutual fund account and continue to generate returns.
4. Fully Digital Process
Banks like ICICI Bank allow eligible customers to apply through Internet Banking or iMobile, eliminating the need for paperwork. Disbursement is typically completed in minutes once lien marking is done.
How to Apply for a Loan Against Mutual Funds
Applying for a loan on mutual funds is simple, especially if your bank provides integrated digital platforms. Here’s a general step-by-step approach:
Through Internet Banking:
- Log in to your Internet Banking account.
- Navigate to: Cards & Loans > Loans > Loan Against Mutual Funds.
- Choose the mutual fund type (equity or debt) for lien marking.
- Enter required details, including FATCA information.
- Review and calculate your eligible loan amount.
- Accept terms and activate the overdraft account.
The process is similar to mobile apps like iMobile. Disbursement happens seamlessly once mutual fund units are pledged and verified.
Interest Rate and Charges
Loans against Mutual Funds are typically offered at competitive rates. Major banks like ICICI Bank clearly detail the applicable interest rates and charges on their websites, making it easy for customers to compare options, understand the total cost, and make informed decisions before applying for any product or service.
Since it’s an overdraft facility, you only pay interest on the amount you use. This makes it cost-effective for short-term borrowing compared to unsecured loans or credit card debt.
Advantages of Taking a Loan on Mutual Funds
1. Liquidity Without Disruption
You get access to instant liquidity without redeeming your investment. This allows you to stay invested during market upsides and avoid exit loads or capital gains tax implications.
2. Capital Appreciation Continues
Because your mutual funds are not sold, you continue to benefit from NAV growth and compounding over the long term.
3. No Fixed EMI Burden
The overdraft nature of the loan provides repayment flexibility. You can pay only the interest for the amount and time it’s used, or repay the principal as per your convenience.
4. Tax Efficiency
Unlike redemption, which may attract capital gains tax, pledging mutual funds for a loan does not trigger any taxable event, making this option tax-efficient.
5. Faster Processing
No lengthy approvals or documentation are needed for eligible account holders. The end-to-end digital process ensures instant sanction and disbursal.
Who Can Avail This Facility?
This facility is typically offered to individuals who:
- Hold mutual fund units registered with CAMS
- Are existing account holders of the lending institution (e.g., ICICI Bank)
- Hold units in an individual capacity (joint holdings may not be eligible in most cases)
Standard KYC documents are required, such as PAN, Aadhaar, and mutual fund statements. For non-individual borrowers, additional financial statements may be needed.
When Should You Consider a Loan Against Mutual Funds?
This facility is best suited for:
- Short-term liquidity needs, such as medical expenses, school fees, or urgent purchases
- Business cash flow gaps
- Avoiding high-interest unsecured loans
- Emergency situations where redemption would result in a loss due to market downturn or exit loads
If the need is temporary and you expect to repay the loan within a few months, taking a loan against securities can be significantly cheaper and more strategic.
Conclusion
Taking a loan on mutual funds is an intelligent way to bridge short-term financial gaps while retaining the long-term benefits of your investments. It provides flexibility, quick access, and cost efficiency, especially when compared to selling your funds or taking high-interest unsecured loans.
With digital solutions offered by leading banks like ICICI Bank, the process is seamless, transparent, and available at your fingertips. Before opting in, review the terms, calculate your eligibility, and consider the usage duration to make the most of this borrowing facility.
In an evolving financial landscape, leveraging your investments smartly can give you the edge without compromising your future goals.
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