For ‘mutual’ consideration: Taking a loan against MFs

Those who have invested in mutual funds can borrow money against their investment – this article explains how.

In today’s day and age, many people looking to create wealth for the future seek the right investment solutions to provide them with stable returns over a period of time. Many also seek options in the capital markets, and mutual fund investments find particular favour with investors. Mutual funds offer diversification and reduced risk, and also increased exposure in the equities space. 

Mutual funds also provide liquidity when there is a financial emergency, by way of loan against mutual funds.

How can you borrow against mutual fund investments?

You can approach a reputed financial institution with your loan request – this loan is granted against the money invested in mutual funds. In essence, the loan against mutual funds is an overdraft to get liquidity for a short term of time. The lending institution takes a lien against the mutual fund units you wish to pledge, depending on their value at that point of time. The lien is dissolved when the loan is fully repaid – at this point, you get complete ownership over the mutual fund units again.

However, the terms of the lien are strict – the bank holds the funds till the loan is fully repaid. You can approach the mutual fund house with a request letter to transfer the lien to the lending institution.

The benefit of this capital market solution is that you can leverage your idle mutual fund investments to get short term monies for professional or personal requirements.

The mutual fund units determine the loan

As with loan products in the capital market solutions portfolio, the loan against mutual funds is determined by the type of fund and how many units of the fund you own.. The interest rate is often a little lower than that of personal loans, and the tenure of the loan is up to one year. The best financial institutions in India offer a minimum of Rs 25 lakh loan against mutual fund units.

Some points to consider about taking loan against mutual funds:

• It is possible to use the loan money for both personal or professional needs
• The Mutual Fund Registrar marks a lien against the fund units you own, and which you wish to transfer to the lending institution
• The loan amount is decided basis the quality of the fund units you own, and the fund units must be on the list of approved securities furnished by the lending institution
• Normally, the loan amount margin is 50%