Loans against MF – everything you need to know about

When you need quick liquidity but don't want to sell your mutual fund investments, a loan against mutual funds (LAM) can be an excellent solution. This financing option allows you to pledge your mutual fund units as collateral and get immediate access to funds while keeping your investments intact and continuing to benefit from potential market growth.

What is a Loan Against Mutual Funds?

A loan against mutual funds is a secured loan where you pledge your mutual fund units as collateral to get a loan from banks or NBFCs. The loan amount typically ranges from 50% to 85% of the current Net Asset Value (NAV) of your mutual fund holdings, depending on the fund category and lender policies.

How Does It Work?

The process involves pledging your mutual fund units with the lender, who then provides you with a loan based on a percentage of the current NAV. Your mutual fund units remain in your demat account but are marked as pledged. You continue to receive dividends and benefit from capital appreciation, but cannot redeem the pledged units until the loan is repaid.

Eligibility Criteria

Eligible Mutual Fund Categories:

• Equity Funds: Usually 50-70% of NAV
• Debt Funds: Usually 70-85% of NAV
• Hybrid Funds: Usually 60-80% of NAV
• ELSS Funds: Generally not eligible due to lock-in period

General Eligibility:

• Age: 21-65 years
• Minimum holding period: Usually 12 months
• Minimum mutual fund portfolio value: ₹1 lakh to ₹5 lakhs
• Good credit history

Key Benefits

1. No Need to Sell Investments

You can access liquidity without disrupting your long-term investment strategy or triggering capital gains tax.

2. Continue Earning Returns

Your mutual fund investments continue to grow, and you receive all dividends and capital appreciation.

3. Lower Interest Rates

Since it's a secured loan, interest rates are typically 1-4% lower than personal loans.

4. Flexible Repayment

Most lenders offer flexible repayment options, including interest-only payments initially.

5. Quick Processing

Digital platforms can approve and disburse loans within hours or days.

Important Considerations

Loan-to-Value (LTV) Ratio

This determines how much you can borrow against your mutual funds. It varies by fund type and lender.

Interest Rates

Rates typically range from 9-16% per annum, depending on the lender and your profile.

Margin Calls

If the NAV of your pledged funds falls significantly, you may need to pledge additional units or partially repay the loan.

Tax Implications

Interest paid on loans against mutual funds is not tax-deductible unless the loan is used for business purposes or buying income-generating assets. However, you avoid capital gains tax as you're not selling your investments.

When to Consider LAM

• Emergency financial needs
• Short-term cash flow mismatches
• Business working capital requirements
• Taking advantage of investment opportunities
• Avoiding premature redemption of long-term investments