Ruchi SrivastavaMutual funds are a great option for investors seeking steady growth and long-term financial goals. They provide a diversified portfolio that minimizes risk while delivering consistent returns. However, unexpected financial needs may prompt investors to sell their mutual funds for quick cash, potentially affecting their long-term plans.
Mutual funds are not only a valuable investment but can also be used as collateral for loans. A loan against mutual funds allows investors to access quick liquidity without selling their holdings. This financing option is becoming increasingly popular in 2025 due to its convenience and competitive interest rates. In this blog, we will explore how to apply for a loan against mutual funds, the eligibility requirements, key benefits, and important factors to consider before making a decision.
What is a Loan against Mutual Funds mean?
It is a secured financing option where investors use their mutual fund holdings as collateral. Banks and non-banking financial companies (NBFCs) provide these loans based on the value of the mutual fund units owned. The loan amount is typically determined by the type of fund, whether equity or debt and its net asset value (NAV).
How Does a Loan Against Mutual Funds Work?
Lenders may have varying criteria for offering a loan, but the process is generally straightforward. Here are the key steps to obtain a loan using your mutual fund investments:
1. Select a lender and submit the required documents
Compare banks and NBFCs that provide loans against mutual funds, reviewing their terms and conditions. Once you have chosen a suitable lender, submit the necessary documents, such as your Know Your Customer (KYC) details, income proof, and mutual fund statements, as required by the lender.
2. Assessment of mutual fund value
The lender evaluates the market value of your mutual fund holdings and investment duration to determine the Loan-to-Value (LTV) ratio. The LTV ratio indicates the percentage of your mutual fund’s value that can be borrowed. For instance, if Raj’s mutual fund has a 50% LTV and is worth ₹10 lakhs, he can avail up to ₹5 lakhs as a loan. This ratio varies across lenders and depends on the type of mutual fund used as collateral.
3. Loan approval process
The lender reviews your credit history along with the LTV ratio. Based on these factors, they decide whether to approve the loan.
4. Disbursement of funds
Once the loan is approved and the mutual fund units are pledged, the lender completes the documentation and transfers the loan amount to your bank account.
5. Loan repayment
After receiving the loan, it must be repaid with principal and interest as per the agreed repayment schedule. Additionally, borrowers should check prepayment options and any applicable charges.
Eligibility Requirements for a Loan Against Mutual Funds
To qualify, borrowers must meet specific eligibility criteria. These requirements ensure lenders have confidence in the borrower’s ability to repay the loan. While criteria may vary between lenders, the following are common factors that determine eligibility:
- Age requirement – The maximum age limit may differ based on the lender’s policies. However, most lenders ask the applicant to be at least 18 years.
- Minimum investment value – Lenders often specify a minimum investment amount to qualify for the loan. This threshold varies depending on the lender and the type of mutual fund held.
- Credit score – A strong credit score improves the chances of loan approval and may also help secure a lower interest rate.
- Proof of income – Lenders typically require income-related documents, such as salary slips, tax returns, or bank statements, to assess the borrower’s repayment capacity.
- Type of mutual fund – The acceptability of a mutual fund as collateral depends on the lender’s internal policies, risk assessment, liquidity considerations, and regulatory guidelines.
Advantages of Taking a Loan Against Mutual Funds
It offers a convenient way to access funds without liquidating investments. Here are some key benefits of this financing option:
- Preserves Investment Portfolio
Borrowing against mutual funds allows investors to retain their holdings while still accessing liquidity. This ensures continued participation in potential market growth and avoids capital gains tax, which may apply if the funds are redeemed. - Fast Loan Approval
Since mutual fund units act as collateral, the loan approval process is quick and hassle-free. Lenders can process and disburse funds faster compared to other loan options. - Tax Efficiency
Using mutual funds as security instead of selling them helps investors avoid capital gains tax, making this a tax-efficient borrowing option. This advantage makes loans against mutual funds a smart choice for quick financial assistance.
How to Apply for a Loan Against Mutual Funds?
Step 1: Evaluate Your Mutual Fund Holdings
Check the current net asset value (NAV) of your mutual funds and confirm whether they qualify as collateral. Lender policies may vary, but both equity and debt mutual funds are typically accepted.
Step 2: Select a Lender
Compare banks and financial institutions offering loans against mutual funds. Review their interest rates, terms, and disbursal process before finalizing a lender.
Step 3: Gather Required Documents
Prepare essential documents such as your mutual fund account statement, identity proof (Aadhar Card, PAN Card), and address proof (rent agreement or utility bill).
Step 4: Submit the Application
Visit the lender’s website to complete the online application and upload the necessary documents. Alternatively, you can apply offline at the bank’s branch.
Step 5: Loan Disbursement
Once the lender approves your application and pledges your mutual fund units, the loan amount will be transferred to your bank account within a few days.
Documents Required for a Loan Against Mutual Funds
While documentation requirements may vary across banks and financial institutions, the key documents needed typically include:
- Proof of mutual fund ownership
- Identity verification document
- Address verification document
Final Thoughts
A loan against mutual funds provides a great solution for investors seeking short-term liquidity without liquidating their investments. However, it is crucial to evaluate your financial position, compare lender terms, and be aware of potential risks before proceeding. With careful planning, you can effectively utilize your mutual fund holdings to meet your financial requirements in 2025.
Sources: msn.com
