Let us suppose you have made enough investments in Mutual Funds, and you are in urgent need of money for some reason. Will you be tempted to redeem your investments? No, you should not, particularly when you can avail of loans against your Mutual Fund investments at attractive interest rates.
How can you avail loan against mutual funds instantly?
We will tell you how.
To avail of a Digital Loan Against Mutual Fund ( LAMF) you should follow the following steps:
1. First, you must Log into your CAMS account via Net Banking.
2. Select the mutual funds to pledge from your portfolio.
3. Input the One Time Password (OTP) sent to you to activate the overdraft facility in your account.
With the possibility to avail loans against mutual funds, individuals can now ensure liquidity against their mutual fund units. Now let us look into these possibilities in detail.
HDFC Bank started a facility last year to avail loan against mutual funds through its internet banking facility. For this, HDFC Bank tied up with CAMS (Computer Age Management Service) which is one among the four R&T Agents designated by Mutual Fund Companies in India. Most of the mutual funds in the country are managed by CAMS, which has a 65% market share. Apart from HDFC, CAMS is currently serving the below-mentioned Mutual Fund Companies as their R&T Agents.
a. DSPBR Mutual Fund
b. IDFC Mutual Fund
c. Kotak Mutual Fund
d. ICICI Prudential Mutual Fund
e. Mahindra Mutual Fund
f. PPFAS Mutual Fund
g. Shriram Mutual Fund
h. SBI Mutual Fund
i. IIFL Mutual Fund
j. HSBC Mutual Fund
k. L &T Mutual Fund
l. Birla Sunlife Mutual Fund
m. Union Mutual Fund
n. Tata Mutual Fund
The interest rate for loans against funds
The loan can be repaid with mutual fund units at a 10% to 11% interest rate. Of course, the terms and conditions imposed by a financier, as well as the loan term, will apply. The interest rate will be lower than an unsecured loan because it is a secured loan. Also, if your credit score is good or you've been a loyal bank customer for a long time, the bank manager may consent to a lower interest rate.
Lien for Mutual Funds
Before we go any further with the process of getting this loan, it's important to understand mutual fund liens. A lien is a document that gives a bank the authority to sell or hold a fund. As a result, if you mark a claim in the bank's name, you're giving the bank ownership of the fund units you hold. You then want to method fund house and ask for a lien for your units in the name of the bank. All the unit holders should sign the request letter for lien transfer.
What are the eligibility conditions to avail Loan against Mutual Funds (LAMF)?
Once you have made up your mind to avail a loan against your mutual fund investments, you need to approach the Banks /NBFCs concerned. The eligibility conditions are as follows-
- Usually, loans will not be sanctioned in case you are less than 18 years of age. Some banks may have maximum age limits too.
- Companies, Partnerships, Hindu Undivided Families (HUFs), and Sole Proprietors are not allowed to avail loans against equity funds. This facility is provided only to the individual holders. However, loans against debt funds may be provided to borrowers in all these categories.
- Each Bank or NBFC has its own limits on the quantum of the loan. This also depends on the type of funds the investor is holding. It may go up to 50% in case of equity and up to 80% -85% when it comes to debt funds. Some Banks /NBFCs may charge service charges too.
- For a loan against Mutual Funds, the rate of interest usually hovers around 10% to 11%.
- All branches of a particular bank or NBFC may not be offering the LAMF facility. Hence, you would do well to cross-check with your lender well in advance.
- Banks may charge pledge and de-pledge fees in addition, when they require adding or removing a lien on the Mutual Fund units at your disposal.
Things to consider when availing of a Loan Against Mutual Fund
Marking of lien:
The process of application involves marking a lien on your mutual fund units in favor of the bank /NBFC. Once the lien is marked, you will not be able to sell or redeem the units. But, you will continue to earn dividends from your units.
While marking of lien, you must provide details such as the folio number, plan, scheme name, an option at the time of filling the application form. The same will then be forwarded to the registrar of mutual funds for the purpose of marking of lien.
Opening of a current account
You need to open a current account with an overdraft facility. An overdraft up to the borrowing limit set on your current account will be allowed. This limit will depend on the collateral mutual fund units you hold.
Cancellation of lien
A lien can be canceled/revoked only when the bank /NBFC issues a written confirmation that the lien may be revoked and also the collateral can be released in the borrower’s favor. In case of any default by the borrower in repaying the loan, the bank can make the recovery by invoking the lien and by seeking redemption of the units under lien.
Now, within just a few minutes, you can pledge your mutual fund assets online and get an overdraft limit set in your current account. This way, you can continue to enjoy the benefits of retention of your mutual fund units without liquidation and can ensure the instant availability of funds.
These loans provide a quick option to receive immediate liquidity against the mutual fund units you hold. The loan against mutual fund is quite similar to an overdraft facility, in a way, for short-term fund requirements, availed for a shorter period of time
Loans against MF are usually offered without any foreclosure or prepayment charges. You can repay the loan amount as and when you have enough cash to close the loan.
Pay interest only on used loan
You need to pay interest only on the used loan amount from the investment plan instead of the entire pledged loan amount.
The rate of interest is usually lower on loans against mutual funds than other personal loans, as it is a secured loan.
What are the benefits of availing of a Loan against Mutual Funds?
The benefits of availing a loan against mutual funds are mentioned below:
- These loans provide a quick option to receive immediate liquidity against the mutual fund units you hold.
- The loan against mutual fund is quite similar to an overdraft facility, in a way, for short-term fund requirements, availed for a shorter period of time
- It is an effective tool to leverage idle mutual fund investments and raise capital against them
- You are not selling your mutual fund units in this arrangement and, as a result, the ownership of your fund units will remain intact well and truly with you, even after pledging them for a loan
- The lenders will be interested to provide loans to you. They know that, even if you default, they can enforce the lien to redeem the units and they can get the proceeds back.
Hope the above-mentioned explanations have given you a fair idea of how to avail of a loan against your mutual fund investments.
The experienced financial experts at Afinoz can provide quality financial advice to you anytime you wish, absolutely free of cost. If you have any queries, feel free to call us at 0120-411-0376.