How loans against Mutual Funds can help you meet your needs?

Thinking of selling Mutual funds? A Guide to get Cash with Your Mutual Fund Investments

Mr. Sridhar, a Software Engineer at Wipro, holds an investment of approximately Rs. 10 lakh in the Tata Large Cap Fund. He urgently needs Rs. 4 lakh to cover his mother’s uninsured medical expenses. He has two options:

Option 1: Sell Mutual Fund Investment

Mr. Sridhar can sell a portion of his Tata Large Cap Fund investment to raise the required Rs. 4 lakh. This option provides immediate liquidity, allowing him to cover his mother’s medical expenses without incurring debt. However, selling his mutual fund may trigger capital gains tax, depending on the holding period and profit earned. Additionally, he will miss out on potential future returns from the sold portion of his investment, which could impact his long-term financial goals.

Option 2: Take a Loan Against Mutual Fund Investment

Mr. Sridhar can take a loan against his Tata Large Cap Fund investment to obtain the required Rs. 4 lakh. This option allows him to access the necessary funds for his mother’s medical expenses while retaining ownership of his mutual fund. By pledging his investment as collateral, he continues to benefit from any future returns on the mutual fund.

Thus, taking a loan against his mutual fund investments is a more feasible and advantageous option for Mr. Sridhar.

Now Mr. Sridhar has the following questions on mind

• Where can he get a mutual fund loan using Tata Large Cap fund ?
• How much of Loan amount can he get?
• What process should he follow to get the loan ?

Where can Mr. Sridhar get a mutual fund loan using Tata Large Cap fund?

• Mr. Sridhar checked the websites of SBI, HDFC and ICICI, and also  check Zerodha, Upstox and Groww
  -SBI offers loans only to mutual funds under the SBI Mutual Fund house and
  -HDFC and ICICI offer loans against funds that have CAMS as a Transfer agent and Tata Large Cap fund satisfies this condition.
  -Brokers generally offer loans against a variety of mutual funds, but the eligibility criteria can vary, so it’s important to verify with each broker.
   

1. Are all Mutual funds eligible for Loans ? 

• Not every mutual fund qualifies for a loan, as each bank and NBFC has a specific list of mutual funds they accept as collateral.

So, how to check it ? 

• To check if your mutual funds qualify, visit the websites of lenders like HDFC Bank, ICICI Bank, SBI, Axis Bank, or NBFCs like Bajaj Finserv and Tata Capital, where you can find information on whether your mutual fund scheme is eligible.
• You can also check  your broker's account to determine the eligibility of your mutual fund for a loan.
   

2. How much can you borrow and are there any limits ? 

• The amount you can borrow by pledging your mutual funds depends on the type of funds you hold and the lending institution's policies. 

• Generally with
  

-Equity Funds : You can borrow around 50% to 60% of the Net Asset Value (NAV), depending on the lender.

-Debt Mutual Funds: You can borrow about 75% to 85% of the NAV, depending on the financial institution.

Loan Limits Against Mutual Funds : 

Loan limits vary from bank to bank, so it's important to check their policies on their website. 

For example:

Public Sector Banks like SBI offer:

Private Banks like HDFC offer :

NOTE: All these are just for examples, please check out the lender’s or broker’s website to get the accurate value.

b) How much of Loan amount can Mr. Sridhar get?

As Mr. Sridhar has Rs.10 lakh worth of Tata large cap which is an Equity fund, he can borrow up to 50% ( i.e Rs.5 lakh ) of the NAV with HDFC and ICICI. 

Quick and Easy Loan Process 

c) What process should Mr. Sridhar follow to get the loan via the Bank? 

Mr. Sridhar is eligible for MF loan at HDFC and ICICI, now he can do the following to avail the loan : 

1. He can go to the website of HDFC and ICICI and fill the application online and get it verified
2. The entire process is online and requires no paperwork 
3. He can simply sign an e-agreement and authorise the pledge of his required mutual fund units.
4. HDFC and ICICI can disburse the loan within a day or two 

Steps to Avail the Loan via Broker’s account

1. Log in to your demat account.
2. Click on "Apply Now" under the loan against mutual fund section to start your application.
3. Enter your PAN number and date of birth.
4. Verify your phone number or email ID using the OTP you receive.
5. Select the mutual fund you want to pledge.
6. You will be shown the eligible loan amount limit.
7. Link your bank account to receive the loan amount.
8. Pledge the mutual fund by verifying the OTP sent to your phone number or email ID.
9. Sign the digital agreement to complete the application.
10. Once verification is complete, the amount will be credited to your linked bank account.

Fees and Charges

Processing fee of Rs. 999 or 1% of the sanctioned loan amount, whichever is higher, up to a maximum of Rs. 4999 + 18% GST. (This fee is auto-deducted from the loan amount, and the remaining amount is credited to your bank account)

Most of these loans are sanctioned as an overdraft facility.

For example, Mr. Sridhar will receive an overdraft limit of ₹ 5 lakhs for his pledged  Mutual Funds. Now, he can withdraw Rs.4 lakhs that is needed and interest will only be charged on the 4 lakhs.

Factors to be considered before taking a loan against MF : 

1. Time frame : Most mutual fund loans need to be repaid within 12 months, which makes them a good option for short to medium term financial needs.
2. Interest rate comparison : 

Interest rates of Mutual fund loans range between 8% to 18%. 

In conclusion, loans against mutual funds are a valuable tool in managing unexpected financial challenges without sacrificing your investment's growth potential.