A loan against mutual funds is a type of loan where customers pledge their funds or securities as collateral to get funds from a lender. In simple terms, it allows individuals to borrow money against the value of their existing investments in shares, mutual funds, or other securities, without needing to sell them.
Here are its top 6 key features for Loan Against mutual funds
- Collateral: In this type of loan, your funds and securities are pledged as collateral against the loan amount. The lender holds the mutual funds until you repay the loan.
- Loan Amount: The loan amount is typically a percentage of the total value of the mutual funds pledged. This percentage can vary based on the lender’s policies and the type of mutual funds being pledged.
- Interest Rates: Interest rates for loans against mutual funds are usually lower compared to unsecured loans, as the funds act as collateral, reducing the lender’s risk.
- Tenure: The loan tenure can vary but is usually shorter than traditional loans. It can range from a few months to a few years, depending on the lender’s terms.
- Repayment: You can repay the loan in EMIs (Equated Monthly Installments) or as a lump sum at the end of the tenure. Failure to repay can lead to the lender selling the pledged mutual funds to recover the loan amount.
- Eligibility: The eligibility criteria for a loan against mutual funds can vary but generally include factors such as the quality of funds, their liquidity, and your creditworthiness.
Overall, a loan against mutual funds can be a useful option for obtaining funds quickly, especially if you have a substantial investment portfolio. However, it’s crucial to understand the terms and risks involved before availing of such a loan.
Loan against mutual funds is a financial product that allows individuals to borrow money against the value of their securities. This type of loan provides a way for investors to access funds without selling their mutual funds. To qualify for a loan against mutual funds, certain eligibility criteria must be met. Understanding these criteria is essential for anyone considering this type of financing.
Let’s explore the key eligibility requirements for a loan against mutual funds in detail.
Ownership of mutual funds:
To be eligible for a loan against mutual funds, the borrower must be the legal owner of the funds being pledged as collateral.
Types of mutual funds:
When taking out a loan against mutual funds, the types of mutual funds that are more likely to be accepted include equity mutual funds, debt mutual funds, hybrid mutual funds, liquid mutual funds, and balanced mutual funds. Acceptability often depends on the policies of the lending institution.
Before applying for a loan, it’s essential to check with the lender to confirm which types of mutual funds they accept as collateral. Keep in mind that the loan amount you can get against your mutual funds will depend on various factors, including the value of your holdings and the loan-to-value ratio set by the lender.
Loan-to-Value Ratio (LTV):
The loan-to-value ratio (LTV) is a critical factor in determining the amount of loan against mutual funds. LTV ratio refers to the ratio of the loan amount to the value of the funds pledged as collateral. Lenders have their own LTV limits, which typically range from 50% to 70% of the value of the funds.
Creditworthiness:
Borrowers are required to meet the lender’s creditworthiness criteria. Lenders may assess the borrower’s credit score, income, repayment capacity, and other financial factors to determine eligibility.
Age Criteria:
Lenders usually have a minimum and maximum age requirement for borrowers. The minimum age requirement is typically 21 years, while the maximum age may vary from lender to lender.
Citizenship:
Borrowers must be Indian citizens to be eligible for a loan against mutual funds. Non-resident Indians (NRIs) and Persons of Indian Origin (PIOs) may also be eligible, subject to certain conditions.
Margin Money:
Borrowers may be required to contribute margin money towards the loan amount. Margin money is the borrower’s own contribution towards the loan and is usually expressed as a percentage of the loan amount.
Documentation:
Borrowers are required to submit various documents to avail of a LAMF. These documents typically include proof of identity, proof of address, proof of income, bank statements, and details of the funds being pledged.
Interest Rates and Fees:
Lenders charge interest on the loan amount, which varies depending on the lender and the prevailing market rates. Additionally, lenders may also charge processing fees, valuation fees, and other charges.
Conclusion
Loan against mutual funds is a valuable financing option for investors looking to access funds without selling their securities. However, meeting the eligibility criteria is very crucial. By understanding the requirements and terms of the loan, borrowers can make informed decisions and use their shareholdings to meet their financial needs.
