If you need money but don’t want to sell your mutual funds, you can get a loan against them. This means you use your mutual fund units as security to borrow cash from a bank or Non-banking Financial Company (NBFC). You keep your investments and get quick funds for emergencies or short-term needs. This option helps you avoid losing out on potential future gains from your mutual funds while solving your immediate cash problems.

What Is a Loan Against Mutual Funds?

A mutual fund loan lets you borrow money by using your mutual fund units as collateral. Whether you qualify depends on the asset management company (AMC) and the type of mutual fund you hold. A mutual fund loan is a type of loan where you borrow money by using your mutual fund units as collateral. This kind of loan is offered by banks, Non-Banking Financial Companies (NBFCs), and similar institutions. The greatest benefit is that you can access cash quickly without having to sell your investments. It’s a way to tap into the value of your mutual funds while still retaining ownership of them.

What Are the Key Benefits of Loan Against Mutual Funds?

Taking out a loan against mutual funds has some great perks, especially if you’re an investor. Let’s explore the advantages of loan against mutual funds:

1. Your Investments Keep Growing

The main benefit is that your mutual funds have the potential to grow even while you use them as collateral for a loan. However, returns from mutual funds depend on market performance and may fluctuate over time. Since you're not selling them, they remain in the market and could earn you more money. This way, you can solve a short-term cash issue without affecting your long-term financial goals.

2. You Get Lower Interest Rates

Loans against mutual funds usually have lower interest rates than personal loans or credit cards. This is because your mutual funds act as security, lowering the lender’s risk. With this guarantee, lenders feel safer and can offer you cheaper loans.

3. Loan Limits Are Flexible

The cash you get depends on what kind of mutual funds you have and what the NBFCs say. Some funds, like ones tied to stocks, might get you a different amount than safer ones tied to bonds. Plus, there’s always a limit—both a high end and a low end—so the loan provider stays safe.

4. Credit Score Stays Safe

Since your mutual funds are used as security for the loan, getting it approved usually doesn’t affect your credit score. If you repay on time, it can even improve your credit profile. This makes it a safer option compared to regular loans, which can hurt your score if not managed properly.

5. You Have Access to Fast Cash

Compared to other loan types, these loans offer rapid access to money with less paperwork and processing time. This can be immensely helpful when you require quick cash flow for personal expenses, business prospects, or emergencies.

6. You May Use it for Multiple Purposes

Unlike some other loan kinds, which may have usage restrictions, the loan amount that you got against mutual funds can be utilised for a variety of purposes.  These loans provide the flexibility to meet a range of financial demands, whether they are for paying for college, a wedding, or a medical emergency.

Application Process for Loans

Getting this loan isn’t difficult, especially now that you can do it online. Here’s how it usually works, step by step:

• Step 1: Log in to your bank’s website or mobile app to begin your application.
• Step 2: You will receive a code on your phone. Enter this code to confirm and agree to the loan terms.
• Step 3: Complete the online form with your personal details and information about your mutual funds.
• Step 4: Choose the loan amount you wish to apply for, based on the limit shown by the bank.
• Step 5: Provide proof of identity and your bank account details so repayments can be set up directly.
• Step 6: Once the bank verifies your mutual funds and secures them as collateral, the loan amount will be credited to your account.

Features of Loan against Mutual Funds

Here are some of the features of loan against mutual funds:

• Quick Money: The cash will be deposited into your account just minutes after approval.
• Works with Most Funds: Loans are available for both debt and equity mutual funds.
• Hold Onto Your Investments: There’s no need to sell anything—your mutual funds remain yours.
• First-time Borrowers: Don’t have a borrowing history? No problem, you can still qualify.
• Pay for What You Use: Interest is charged only on the amount you use, not the full offered amount.
• Spend It Anywhere: There are no restrictions on how you can use the cash—it’s entirely up to you.

Conclusion

A loan against mutual funds is an effective way to access funds quickly without disrupting your investment plans. It typically offers low interest rates, flexibility in how you use the money, and allows you to continue earning returns on your investments. Compared to other borrowing options, it provides a balanced solution to meet immediate financial needs while preserving your future financial growth. If you face an urgent expense or identify a valuable opportunity, this loan can serve as a reliable financial resource.

FAQs

What are the benefits of taking a loan against mutual funds?

The benefits are that you can access cash quickly without having to sell your investments, and you can continue earning returns on your investments while the loan is outstanding.

How does the loan amount get determined?

Loan amounts are determined by lenders based on a applicant's ability to repay, creditworthiness, and the value of any collateral, along with factors like income, debt-to-income ratio, and loan type.

What types of mutual funds can be used to secure a loan?

Most equity, balanced, debt, and liquid funds can be used to secure a loan, but less liquid assets like real estate funds may not be accepted.

How long does it take to get approved for a loan against mutual funds?

If you submit all the required paperwork promptly, approval can take a few business days in most cases.

Do applicants need to submit the physical documents of mutual fund holdings?

Sometimes, physical documents are required, but digital copies of your statements are often enough for loan providers to evaluate your funds.

Can applicants continue to invest in their mutual funds after taking out a loan against them?

In most cases, applicants can continue making new investments into the mutual funds they have pledged, but these may not count towards the collateral value.

How are interest rates on loans against mutual funds compared to other types of loans?

Interest rates are often lower than other unsecured loans like personal loans but higher than secured loans like home equity loans.

What should applicants consider before taking a loan against their mutual funds?

Before deciding, applicants should consider repayment ability and the risk of liquidating investments if markets decline and compare costs to other funding options.