In today’s fast-paced world, financial requirements can arise at any time. Instead of turning to high-interest loans or liquidating long-term investments, many investors are now considering a smarter route—Loan Against Mutual Funds (LAMF). This innovative financing option offers the benefit of maintaining your investments while addressing urgent monetary needs.
What is a Loan Against Mutual Funds?
A Loan against Mutual Funds is a type of secured loan where mutual fund units are pledged as collateral to a lender. The borrower receives a loan amount proportional to the Net Asset Value (NAV) of their investments without selling them. This ensures continued participation in the market while gaining access to immediate liquidity.
How It Works
The process is straightforward. After identifying a lender, you provide details of your mutual fund holdings. The lender evaluates the portfolio and places a lien on the units. Based on the type of mutual funds—debt or equity—and current market value, a loan is sanctioned, typically ranging between 50% and 70% of the mutual fund's worth.
The loan is disbursed quickly, often within 24 to 48 hours, making it suitable for time-sensitive financial needs.
Benefits of Loan Against Mutual Funds
Investment Continuity: Since units are not sold, they continue to earn returns.
Quick Disbursal: The loan process is faster compared to traditional loans.
Competitive Interest Rates: Being secured, the rates are lower than personal loans.
Flexible Usage: Funds can be used for personal, business, or emergency needs.
Who Can Avail This Loan?
Anyone who owns mutual fund units in demat form or physical form can apply. The borrower must be a KYC-compliant individual or a non-individual like companies or HUFs. Most lenders prefer demat-held funds due to ease of processing and documentation.
Limitations and Risks
Market Dependency: A fall in NAV may lead to margin calls or partial repayment requests.
Restricted Access: Once pledged, you cannot redeem or switch your units until the loan is cleared.
Loan Cap: Not all types of funds may be accepted, and the LTV (Loan-to-Value) ratio may be lower for equity funds due to market volatility.
Ideal Use Cases
Short-term working capital
Home renovation
Medical treatment
Educational fees
Conclusion
A loan against mutual funds can be a prudent way to unlock liquidity without losing out on long-term wealth creation. As with any financial product, understanding the terms and evaluating the risks is essential. Speak with your financial advisor to determine if this option aligns with your goals.
