Loan Against Mutual Funds (MF) – Overview, meaning & benefits

Investments are a gateway to financial freedom and wealth creation. Mutual Funds are one of the most popular investment options because of their benefits such as diversification, professional management, liquidity, and flexibility. To truly harness the power of compounding in your investments, it's crucial to stay invested for a longer period of time. However, there might arise certain situations where you urgently need funds. Should you liquidate your mutual fund investments in those times?

It may not be prudent to redeem your mutual fund investments as it may interrupt the wealth creation process for your long-term goals. Then what’s the better option? Simple: go for an Instant Loan Against Securities. This basically includes loans against equity shares, mutual funds, listed bonds, convertible bonds, etc. Let’s understand how you can get a loan against your mutual fund investments.

What are Loans Against Mutual Funds?

Loans Against Mutual Funds are basically a type of Loan Against Security whereby banks and financial institutions grant loans to you by accepting your mutual fund units as security. It is similar to a Loan Against Shares; the only difference here is that the mutual fund units will be provided as security. The loan amount depends on the value of your Mutual Fund units as of the date of making the application.

Why Loans Against Mutual Funds?

If you are urgently looking for funds, then here’s why you should go for Loans Against Mutual Funds:

• No need to dilute investments: Whenever a financial emergency arises, you are left with two options: either sell your investments or take loans. Loans Against Mutual Funds help you avoid diluting your investments. This ensures that your investments enjoy uninterrupted growth.
• Affordable: Loans Against Mutual Funds are a form of secured loan. Interest rates on secured loans are usually lower than those on unsecured loans. Therefore, secured loans are quite affordable and can help save a lot of interest rate costs compared to other expensive loans like credit cards, personal loans, etc.
• Helps meet sudden contingencies: Loans Against Mutual Funds are instrumental in meeting financial contingencies. Whether it is about meeting medical emergencies or any other expenses, Loans Against Mutual Funds can help you meet them easily.
• Helps achieve financial goals: Taking a loan instead of diluting your investments can help you achieve your financial goals faster. It is a well-known investment fact that compounding kicks in at later stages of investments. Therefore, you need to hold your investments for a certain period to reap compounding benefits. Diluting investments to meet emergencies can prevent you from reaping these benefits. Thus, you should always go ahead with choosing a loan option to keep your investments intact and get compounding benefits.
• No documentation: Loans Against Mutual Funds are processed instantly due to its simple and paperless process.

Also Read: Loan Against Securities: Meaning, pros & cons

Choosing the right lender

If you are willing to apply for a Loan Against Mutual Funds, it is important to choose the right lender. This ensures you get the best deal, a good loan-to-value ratio, an affordable interest rate, and flexible terms and conditions. When choosing a lender, the loan-to-value ratio becomes important. It shows how much of a loan amount you can get against the value of securities.

Suppose the value of your securities is ₹1 lakh and the loan amount that the lender is offering is ₹60,000. Therefore, your LTV ratio will be 60%, i.e., ₹60,000/₹1,00,000. The higher the LTV, the better it is, as you have to provide a lower value of securities to obtain loans against security.

Axis Bank offers high-value loans against securities with overdraft facilities at competitive rates. The Loan to Value ratio for such loans starts at 50% and depends on the type of security you wish to provide.

Disclaimer: This article is for information purpose only. The views expressed in this article are personal and do not necessarily constitute the views of Axis Bank Ltd. and its employees. Axis Bank Ltd. and/or the author shall not be responsible for any direct / indirect loss or liability incurred by the reader for taking any financial decisions based on the contents and information. Please consult your financial advisor before making any financial decision. Mutual Fund investments are subject to market risk, read all scheme related documents carefully. Axis Bank Ltd is acting as an AMFI registered MF Distributor (ARN code: ARN-0019). Purchase of Mutual Funds by Axis Bank’s customer is purely voluntary and not linked to availment of any other facility from the Bank. T&C apply.