Mutual funds, as you may know, are a powerful avenue for wealth creation. But are you aware that when you urgently need money, for any legitimate purpose, you can even take advantage of the loan against your mutual funds?

The popularity of digital lien marking for banks in recent years has grown rapidly, and it is extremely easy and convenient to borrow online by offering your mutual fund units as collateral. But how prudent it is, let's understand in detail...

What is a mutual fund loan and how does it work?

A loan against mutual funds is a type of loan against securities. It gives you the flexibility to access your investment money on demand without having to redeem or sell your securities—in this case, your mutual fund investments.

It gives you the option to use your mutual fund investments to get a loan by committing them to the bank or NBFC. The value of the loan for which you will be eligible depends on the value of the units you have in your folio.

Since mutual fund units are pledged as collateral, pledged units are not allowed to be redeemed unless you repay the loan in full. In case you have ongoing SIPs (Systematic Investment Plans), your subsequent SIPs are not interrupted in the process.

Many banks and non-bank finance companies (NBFCs) today offer loans against mutual funds, both offline and online. Some well-equipped digital banks, such as ICICI Bank, HDFC Bank and SBI, to name a few, offer loans against mutual funds online without any paperwork. These loans are a kind of pre-approval for a set of pre-qualified clients.

However, not all banks and NBFCs accept mutual funds managed by all asset management companies (AMCs). For example, SBI has been offering a loan against mutual fund units only to SBI Mutual Fund investors. Then there are other leading banks that accept only fund houses registered with Computer Age Management Solutions Private Limited (CAMS), India's largest mutual fund transfer agency.

For example, if you have investments in any mutual fund registered with CAMS and have a savings bank account with ICICI Bank, you are likely to be their pre-qualified borrower for loans against mutual funds. ICICI Bank has provided a comprehensive list of approved mutual fund schemes across all mutual fund houses. Going a step further, ICICI Bank clarifies that its pre-qualified borrowers do not need to hold mutual fund investments through their distribution code. The minimum loan against mutual funds that can be obtained from ICICI Bank is Rs 50,000, while the maximum loan amount can be Rs 20 lakh in the case of equity mutual funds offered as collateral, and up to Rs 5 million. rupees in the case of debt mutual funds. money.

HDFC Bank also offers a minimum loan amount of Rs 50,000 while the maximum is Rs 20 lakh against equity mutual funds and Rs 1 crore against debt funds. However, HDFC Bank allows lending against mutual funds to its clients who have investments with any of these fund houses: Aditya Birla Sun Life Mutual Fund, DSP Mutual Fund, HDFC Mutual Fund, HSBC Mutual Fund, ICICI Prudential Mutual Fund, IDFC Mutual Fund, Kotak Mahindra Mutual Fund, L&T Mutual Fund, SBI Mutual Fund, and Tata Mutual Fund.

The same goes for some NBFCs like Tata Capital and Bajaj Finserv that offer loans against securities. Tata Capital offers you a loan from Rs 5 lakh to Rs 20 crore, while for Bajaj Finserv, the threshold is Rs 10 crore.

When should you apply for a loan against mutual funds?

You may consider borrowing against your mutual fund investments only when you have a serious need for money and do not want to liquidate your investments and/or discontinue your assigned SIPs for other anticipated financial goals. Borrowing against your mutual fund holdings to take advantage of market volatility should be strictly avoided.

Also, be careful about borrowing when markets are near their peak, asset prices have risen, and the value of mutual fund holdings has risen. Although it may make it easier for you to get a larger amount as a loan, on the other hand, if asset prices drop, you may be subject to a margin call (you will be asked to pay the margin money) or you will be asked to provide more securities as collateral, plus you would have to bear the high cost of interest involved.

When markets are near a top and the value of your investment has appreciated, instead of redeeming a portion of your mutual fund investments (particularly those that have underperformed), it may be a better option.

Borrowing is recommended when markets have fallen sharply and asset prices are low. Although you may not be able to avail a larger loan amount, at least the risk is reduced. You can avoid the loss you would otherwise incur by selling mutual fund units at a lower price. And when the markets rise again, you won't be subject to a margin call or asked for more collateral, as your mutual fund investments may also have done better with rising underlying asset prices. That said, if markets and asset prices fall further unexpectedly, you may need to pay margin or offer more mutual fund shares/securities as collateral.

Likewise, be careful about offering debt funds as collateral. Entities such as IL&FS, DHFL, Reliance ADAG, Yes Bank, Essel group, among others, defaulting on their debt documents and many debt mutual fund schemes facing the brunt, it is a stark reminder that investments in schemes of debt mutual funds are not safe.

If the debt mutual fund schemes you have have poor portfolio characteristics, it may affect the performance of the scheme and you may need to offer additional collateral or a payout spread in the event your debt fund committed to take advantage of a loan incurs losses.

When and how to close a loan against a mutual fund?

On diligent payment of the loan in full, the fund house removes the lien on the units of its mutual fund at the request of the lender. Once the lien is removed, you can have full access to your mutual fund investments. Many lenders allow partial payment of loans. In that case, the lender will release some units depending on the amount that you have paid in part.

And if you can't repay the loan, the lender asks the fund house to redeem the mutual fund units and receives outstanding instalments from the proceeds of the redemption.

In conclusion:

These days, due to increased awareness on the part of banks and NBFCs, lending against mutual funds has become a popular credit option. That said, before you make use of a Loan against Mutual Funds, carefully assess the purpose for which you need the money, how you plan to repay it, and be sure to read all of the terms and conditions carefully.

In the event of a financial emergency, borrowing against mutual funds may be one of your options, instead of liquidating your mutual fund portfolio. However, you should carefully assess the level and conditions of the market before taking out a loan against your mutual funds.

About Us

CAMS’ paper-less solution streamlines loan approval and lien marking processes. It leverages the myCAMS portal to provide a seamless experience to your end customers who have invested in CAMS serviced Mutual Funds. The solution brings access to schemes of 17 Mutual Funds clients serviced by CAMS.

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