how to take loan against mutual fund

Taking a Loan Against Your Mutual Funds: A Comprehensive Guide for Indian Investors

Thinking of tapping into your mutual fund investments but hesitant to sell? Taking a loan against mutual funds (LAMF) could be a viable option. This guide delves into the nitty-gritty of LAMFs, empowering you to make informed decisions for your financial needs.

What is a Loan Against Mutual Funds (LAMF)?

LAMF is a secured loan you can avail by using your existing mutual fund units as collateral. The lender, typically a bank or financial institution, grants you a loan amount based on a specific percentage of your mutual fund’s net asset value (NAV). This percentage, known as the Loan-to-Value (LTV) ratio, varies depending on the lender and the type of mutual fund scheme. Generally, LTV ratios for LAMFs range between 50% and 75%.

Benefits of Taking a Loan Against Mutual Funds:

• Preserves Investment Potential: You don’t have to sell your mutual fund units, allowing you to benefit from potential future growth.
• Improves Liquidity: Access funds quickly without disrupting your long-term investment goals.
• Tax Efficiency: Interest payments on LAMFs may be tax-deductible in certain situations, consult a tax advisor for specifics.

Things to Consider Before Taking a LAMF:

• Interest Rates: LAMF interest rates are often higher than personal loan rates. Carefully evaluate the interest cost against your borrowing needs.
• Market Volatility: If the market falls, your LTV ratio may decrease, requiring you to add more collateral or risk having your units sold to cover the loan.
• Margin Call: If the value of your mutual funds falls below a certain threshold, the lender might issue a margin call, requiring you to deposit additional collateral or repay part of the loan.

Steps to Take a Loan Against Mutual Funds:

1. Choose a Lender: Compare interest rates, LTV ratios, and processing fees offered by different lenders.
2. Select Eligible Mutual Funds: Not all mutual funds are LAMF-eligible. Check with your lender or mutual fund house for approved schemes.
3. Submit Loan Application: Submit the required documents, including KYC proofs, income proof, and details of your chosen mutual fund units.
4. Loan Approval and Disbursement: Once approved, the loan amount will be credited to your account, and your mutual fund units will be marked as pledged with the lender.

Here’s a table summarizing the key points of LAMFs:

Remember, LAMFs are a financial tool to be used strategically. Carefully assess your financial situation, consider alternatives, and thoroughly understand the associated risks before making a decision. Consulting a financial advisor can be beneficial for personalized guidance.