Everything you need to know about Loan Against Mutual Funds
Over the past few years, there has been phenomenal growth in the participation of retail investors in capital markets in India. More people are investing their money through mutual funds than ever. The SIP contribution of retail investors in FY 23-24 was Rs.1,99,219 Cr whereas for the same period in FY 2016-17, it was Rs.43,921 Cr. A major part of these investments were made towards equity schemes. Experts recommend investors stay invested in equity schemes for the long term to achieve their long-term goals and ensure healthy returns. However, most investors redeem their mutual funds before their goals are realized. In the face of any emergency or unplanned expense and inadequacy of funds, the first option that comes to the mind of most retail investors is to redeem their mutual fund investments.
What other alternatives do they have?
- Selling gold or real estate: In India, in addition to their monetary value, gold and real estate also carry a sentimental value. They are often associated with the social status of the individual or a family. Also, liquidation or pledging of a real estate property is a tedious process.
- Opting for an unsecured loan or asking for a friend: Unsecured loans often come with a high-interest rate. Asking a friend for money is generally avoided by most due to a social stigma attached to it.
Mutual funds being easy to redeem are naturally considered for liquidation! Is it possible to prevent such untimely redemption of mutual funds investments while using them at the same time to raise funds to manage expenses? The answer is Yes! Availing Loan Against Mutual Funds could prove to be beneficial in such a scenario.
What is Loan Against Mutual Funds?
Loan Against Mutual Funds is a type of secured loan that lets you borrow money by pledging your mutual funds investments as collateral. Pledging your mutual funds as collateral reduces the credit risk of the lender resulting in a reduced interest rate for the borrower.
At Mirae Asset Financial Services, the loan is offered as an Overdraft facility. The borrower is allowed to withdraw and repay funds anytime they want without having to repay the principal during the entire tenure of the loan.
Who offers Loan Against Mutual Funds?
Loan Against Mutual Funds can be availed through various licensed RBI-registered NBFCs, Fintechs, or Banks.
- While customers may have an existing relationship with the bank, the bank may have a traditional approach to providing the loan resulting in longer wait times, branch visits, etc.
- NBFCs often offer faster loan processing, better eligibility criteria, and higher loan amounts as compared to banks.
- Most Fintechs collaborate with a lending partner to source their funds for facilitating the loans, thereby putting additional pressure on the fintech to increase their interest rates and processing fees due to the higher borrowing cost.
How is a digital loan against mutual funds different from a traditional loan against mutual funds?
Digital loan against mutual funds and traditional loan against mutual funds are both ways to use your mutual fund investments to obtain funds without redeeming them, but they differ in the process, convenience, speed & cost.
| Parameter | Traditional | Digital |
|---|---|---|
| Process | You need to visit a bank or financial institution physically, fill out paperwork, provide documentation, and wait for approval. The process might involve verification of your creditworthiness, collateral assessment, and other steps. | The process is streamlined and usually entirely online through an App or Website. You can apply for the loan, submit documents, and get approval without leaving your home. The digital process often involves less paperwork and faster approval times. |
| Speed | It is time-consuming, involving manual verification and approval steps. It might take several days or even weeks to get the funds. | With automated processes and online verification, you may receive approval and disbursement of funds much quicker, even in minutes. |
| Convenience | While it offers face-to-face interactions with bank representatives, the overall process can be cumbersome, requiring multiple visits and paperwork. | Provides convenience through their online platforms. You can apply, track the status of your application, and manage your loan entirely from your computer or smartphone. |
| Cost | Traditional loans may involve higher processing fees, administrative charges, and interest rates compared to digital alternatives. | Digital platforms often boast lower fees and competitive interest rates, as their streamlined processes and lower overhead costs translate into savings that can be passed on to customers. |
Who can avail Loan Against Mutual Funds?
Every lending institute may have a different set of criteria to avail Loan Against Mutual Funds. Broadly, any individual who owns open-ended mutual funds (close-ended mutual funds may not be considered for pledging) can pledge those funds to avail of the loan. Even the free units of ELSS mutual fund (outside of lock-in period) may be pledged to avail of the overdraft facility.
At Mirae Asset Financial Services, Loan Against Mutual Funds may be availed by anyone who holds mutual funds approved by the MAFS policy with CAMS or Kfintech. The individual must be between the age from 18 to 75, should be citizen of India, should have a valid PAN & Aadhaar Card, has a valid email ID and phone number. They should also have a valid bank account number and a cheque copy for the account to be linked.
How does Loan Against Mutual Funds Work?
Let’s understand the working of Loan Against Mutual Funds
account with the help of an example.
Mr. Akash pledges mutual funds worth ₹5,00,000 and avails an overdraft facility with a
limit of ₹2,25,000 at an LTV (Loan to Value) ratio of 45%.
- He withdraws ₹1,00,000 today for business expenses.
- After 10 days, he withdraws another ₹50,000.
Interest is charged only on the amount withdrawn. For the first 10 days, interest is applied on ₹1,00,000, and thereafter, on ₹1,50,000.
- After 20 days, Mr. Akash repays ₹1,00,000, reducing his outstanding balance to ₹50,000, and interest is then charged only on this amount.
- On Day 30, he depledges ₹1,00,000 worth of mutual funds, bringing his pledged value down to ₹4,00,000. The loan limit is revised to ₹1,80,000 (45% of the new pledged value).
Loan Snapshot:
| Day | Value of Pledged Mutual Funds | Loan Limit | Utilized Amount | Available Limit | Accumulated Interest (@10.5% p.a.) |
|---|---|---|---|---|---|
| Day 1 | ₹5,00,000 | ₹2,25,000 | ₹1,00,000 | ₹1,25,000 | ₹0 |
| Day 10 | ₹5,00,000 | ₹2,25,000 | ₹1,50,000 | ₹75,000 | ₹288 |
| Day 20 | ₹5,00,000 | ₹2,25,000 | ₹50,000 | ₹1,75,000 | ₹671 |
| Day 30 | ₹4,00,000 | ₹1,80,000 | ₹50,000 | ₹1,30,000 | ₹864 |
At the end of the month, Mr. Akash only needs to repay ₹864 in interest. He retains the flexibility to repay the principal at his convenience.
In this example, we see that Akash had the flexibility to withdraw and repay funds at any time during the loan tenure, with interest charged only on the amount utilized and for the specific days it was in use. He also had the option to depledge his securities if he wanted to redeem them at any point during the loan. Additionally, he could pledge more mutual funds to increase his eligible loan limit whenever needed.
To know more about Loan Against Mutual Funds
What happens when the value of the pledged mutual funds drop?
The mutual funds in the overdraft account are revalued daily. If the value of the mutual funds decreases, the eligible overdraft limit is also reduced (revised collateral value × LTV%). If the utilized amount exceeds the revised eligible limit, the difference is classified as overdue. In such cases, the borrower receives a margin call, requiring them to clear the overdue amount by either making a payment or pledging additional mutual funds.
The borrower must resolve the overdue balance within the timeline as stipulated by the lender or the lender may be forced the pledged mutual funds units as a last resort to recover the overdue amount. Conversely, if the value of the mutual funds increases, the eligible limit automatically adjusts upward, and if the utilized amount is below this new limit, there will be no overdue balance.
How to apply for Loan Against Mutual Funds?
A digital loan against mutual funds is very easy and convenient to apply via web or app. You can start the application by installing the App of the lending institution or visiting their website. You need to provide their basic information, select the type of mutual funds, complete KYC, lien mark at the RTAs, verify the bank account details, and e-sign the agreement.
At Mirae Asset Financial Services, the Loan Against Mutual Funds Process can be completed within 15 minutes with these 6 easy steps:
- Download the App on your Mobile or Apply via the Web
- Select the mutual funds you want to pledge. (viz. equity or debt mutual funds)
- Complete one-time KYC registration with PAN & Aadhaar details. (Details can be fetched directly from Digilocker if your Aadhaar is linked to your mobile number)
- Lien mark at RTA’s (CAMS/KFintech) portal through One-Time Password (OTP) authentication.
- Verify your bank account online via e-mandate. (this is required for the auto-debit of your monthly interest amount)
- Read & sign loan agreement online.
Your Overdraft Account Against Mutual Funds In Just 15 Minutes
What are the interest rates and other charges for Loan Against Mutual Funds?
The interest rates for Loan Against Mutual Funds could vary from 9% to 20%. Most lenders charge an additional variable processing fee as a percent of the loan amount. Other charges may also be levied at the time of prepayment or foreclosure of the loan account.
At Mirae Asset Financial Services, you can avail of Loan Against Mutual Funds for an interest rate of 10.5% p.a. The interest amount is deducted from the borrower’s bank account every month which is charged only on the utilized amount and for the number of days it is utilized. The borrower is charged a flat processing fee of Rs.999 + Taxes for the creation of the overdraft facility against the mutual funds. At MAFS, there is no additional charge for prepayment or foreclosure of the loan account.
Apart from these basic charges, if a borrower defaults on their interest or principal payment, they may have to pay additional charges such as interest bounce charges, penal charges, etc.
Conclusion
Basically, you can use your mutual fund investments as collateral to borrow money when you need it. But remember, you have to pay back the loan completely so you can get your mutual funds back and continue to hold them or redeem them without paying extra charges. It's wise to only use this loan if you need the money right away for your expenses, not for investing in risky things like the stock market or speculative activities.
