Many investors are unaware that their Mutual Fund investments can do more than just generate long-term wealth—they can also serve as collateral for a loan. A Loan Against Mutual Funds allows investors to borrow money without selling their assets, helping them meet urgent financial needs while their investments continue to grow. This financial solution is beneficial for those seeking liquidity without disrupting their long-term financial goals.
Leading banks, such as ICICI Bank, offer flexible Loan Against Securities options, enabling borrowers to leverage their investments efficiently. However, before applying for this facility, it is crucial to understand the eligibility criteria set by financial institutions to ensure a smooth approval process.
Who Can Apply for a Loan Against Mutual Funds?
To qualify for a digital Loan Against Mutual Funds, applicants must meet specific eligibility requirements that vary from lender to lender. Below are the key criteria that financial institutions consider:
1. Age Criteria
Financial institutions set a minimum and maximum age limit for applicants. The standard age requirements include:
- Minimum Age: 18 years
- Maximum Age: 75 years
For example, ICICI Bank has set the upper age limit at 75 years, ensuring that even senior investors can utilise their Mutual Fund holdings to meet financial needs.
2. Residency Status
The applicant’s residential status plays a significant role in determining eligibility. Most banks and NBFCs extend this facility to:
- Resident Indians
- Non-Resident Indians (NRIs) (applicable with certain restrictions)
NRIs may need to comply with additional documentation requirements or route transactions through an NRO/NRE account.
3. Type of Mutual Fund Holdings
Not all Mutual Funds qualify for loans. Banks typically have an approved list of Mutual Fund investments that they accept as collateral. Commonly accepted fund types include:
Equity Mutual Funds
Debt Mutual Funds
4. Minimum Loan Amount
Financial institutions often set a minimum loan amount for Mutual Funds being pledged. The minimum requirement varies:
- The minimum loan amount is ₹ 50,000.
- The maximum loan amount is ₹ 20 lakh for equity Mutual Funds and ₹ 1 crore for debt Mutual Funds.
Loan-To-Value (LTV) Ratio and Margin Requirements
The Loan-to-Value (LTV) ratio determines how much loan you can avail against your Mutual Funds. It is calculated as a percentage of the Net Asset Value (NAV) of your pledged funds.
Standard LTV Ratios:
- Equity Mutual Funds: Up to 50% of the NAV
- Debt Mutual Funds: Up to 80% of the NAV
Key Documents Required for Loan Against Mutual Funds
To apply for a Loan Against Securities, borrowers must submit the following documents:
1. Identity Proof (Any One)
- PAN Card
- Aadhaar Card
- Passport
- Voter ID
2. Address Proof (Any One)
- Aadhaar Card
- Utility Bills (Electricity, Water, Gas, or Telephone)
- Passport
- Rental Agreement
3. Mutual Fund Statement
- Mutual Funds must be in Demat form as per the approved list.
- Latest holding statement from the Asset Management Company (AMC) or RTA.
Interest Rates and Repayment Options
1. Interest Rate Structure
The Loan Against Mutual Funds is provided through an Overdraft facility. The interest rate for a Loan Against Mutual Funds is lower than unsecured loans.
- Interest is charged only on the utilised amount for the utilised period.
Advantages of the Loan Against Mutual Funds
1. No Need to Sell Investments
Unlike liquidating Mutual Funds, a Loan Against Securities lets investors retain ownership while securing funds.
2. Lower Interest Rates
Since the loan is secured against assets, interest rates are lower than unsecured loans.
3. Faster Loan Disbursal
Many banks offer digital loan processing, enabling borrowers to pledge funds and access credit within 1-2 days.
4. Pay Interest Only on Utilised Amount
With an overdraft facility, borrowers are charged interest only on the amount they use, making this a cost-effective option.
5. Retain Mutual Fund Growth Potential
Investments continue to generate potential returns, ensuring wealth accumulation while securing liquidity.
Things to Consider Before Applying
- Loan Costs: Apart from interest, lenders may charge processing fees, pledge fees, and prepayment penalties.
- Market Fluctuations: If the NAV of your Mutual Funds drops significantly, the lender may ask for additional collateral.
- Early Repayment Terms: Check for foreclosure charges if you plan to repay the loan early.
Conclusion
A Loan Against Mutual Funds is an excellent way to access liquidity without disturbing long-term investments. However, understanding the eligibility criteria, loan terms, and repayment options is essential before applying.
Leading financial institutions, including ICICI Bank, offer flexible Loans Against Securities options with quick processing, attractive interest rates, and digital pledging facilities. By ensuring that your Mutual Fund portfolio meets the lender’s eligibility criteria, you can leverage this financial tool to meet your urgent cash needs effectively.
