How to Take Loans Against Mutual Fund Units

Mutual fund units can be pledged as collateral to secure loans, offering a way to leverage your investment. Lenders typically provide loans based on the market value of the mutual fund units. The loan amount may range from 50% to 70% of the fund’s current value, depending on the type of fund and lender policies. Interest rates and terms vary, with the loan being repaid once the mutual fund units are redeemed. It’s important to ensure that the investment aligns with your financial goals and risk tolerance.

Who qualifies for loans against mutual fund units?

• Any resident Indian investor who has invested in Indian mutual fund units are eligible for loan against mutual funds (LAMF).

What type of investors should consider such loans?

• Any long term investor who has a need for money and does not want to sell their mutual fund units should apply for LAMF.
• Investors who values long term growth and plans for specific goals should apply for LAMF, for their  short to mid term financial needs – instead of redeeming their mutual fund units.

Are there better alternatives based on the customer’s needs and eligibility?

• Not with the interest rate offered with secured products like LAMF.

What factors should one evaluate before applying for such loans?

• About one’s goals and time frame for the mutual fund investment.
• Can one pay the interest amount / EMI amount each month from their income.
• The past and expected returns of their mutual fund investments.
• Are they gaining from this product that solves their short-mid term financial needs the typical growth of an equity mutual fund scheme is 12% to 15%  CAGR.

Any other vital details customers should know before proceeding with such loans?

• Interest rate, flexible tenure, renewal options, shortfall margins (when the lender will sell their mutual funds), flexibility in monthly instalment dates and EMI vs interest only options.

How much is LAMF cheaper than personal loans?

• Usually personal loans are offered between 14% to 22% (depending on the applicant).  LAMF is offered between 10.5% to 12%.

• LAMF has no prepayment penalties.  When the customer gets money to repay the loan he/she can close the loan instantly.

• Your asset (mutual fund units) grow during the tenure of the loan.

Additional information :

Loan approval is based on the Loan-to-Value (LTV) ratio of your mutual funds

• Yes

Equity mutual funds: Get 50%–70% of the Net Asset Value (NAV)

• 50% of NAV and as per RBI guidelines.

Debt funds: Can secure up to 80% of NAV

• Yes

About the Author:

Chandrasekar has been a serial entrepreneur for the last 20+ years building and managing companies in USA and India. His companies have been in the  online financial services spectrum offering products for retail customers. After finishing his master’s degree, Chandra started his career at MicroStrategy, a leading data mining and analytics firm in USA. Later, he moved on to work for Morgan Stanley and the Canadian Imperial Bank of Commerce, in New York city, before starting his own retirement solutions company – ExpertPlan – in 1999.