A loan against mutual funds (MFs) allows investors to borrow funds using their MF units as collateral. This option is increasingly popular among investors seeking quick liquidity without redeeming their investments.
While it offers convenience and flexibility, it’s essential to understand the risks, benefits, and best practices to make a financially sound decision.
Key Benefits
Quick Access to Funds
Loans are processed faster than personal loans or business loans.
Ideal for short-term financial needs like emergencies or business requirements.
No Need to Redeem Investments
Preserve your mutual fund holdings and continue earning returns.
Lower Interest Rates
Interest rates are often lower than unsecured loans as the loan is secured by MF units.
Flexible Repayment
Borrowers can repay over a tenure suited to their cash flow.
Potential Risks
Market Volatility
A decline in the mutual fund’s NAV may require additional collateral or partial repayment.
Default Consequences
Failure to repay may lead to forced redemption of mutual fund units.
Interest Costs
While lower than unsecured loans, interest still accrues and must be factored into planning.
Eligibility Limitations
Not all mutual funds are eligible; primarily open-ended equity or debt MFs are considered.
Best Practices
Borrow Conservatively: Limit loans to 50–70% of MF value to avoid margin calls.
Choose Stable Funds: Prefer large-cap or debt funds to minimize volatility risk.
Plan Repayment: Ensure you can service interest and principal without selling units.
Compare Lenders: Check rates, tenure options, and foreclosure charges across banks and NBFCs.
Monitor Portfolio: Keep track of NAV changes and maintain additional collateral if necessary.
FAQs
1. Who can avail a loan against mutual funds?
Any investor holding eligible mutual fund units with a recognized bank or NBFC.
2. How much can I borrow?
Typically, 50–70% of the current value of your mutual fund units, depending on lender policies.
3. Which types of mutual funds are eligible?
Primarily open-ended equity and debt mutual funds. Liquid funds are often preferred due to stability.
4. What happens if I fail to repay?
The lender may redeem your mutual fund units to recover the outstanding loan and interest.
5. Are interest rates high?
Rates are usually lower than unsecured loans, but they vary by bank, NBFC, and fund type.
Published on : 13th September
Published by : SMITA
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