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personal loan against mutual funds

Personal Loans Against Mutual Funds: Features & Eligibility

India is an economically growing country. So much so that over 53% of the population borrows at least some type of personal loan before 30.

Now while borrowing a personal loan (in most cases) is convenient, there are always ways to do it better, safer, and easier than any traditional loans that we hear from our parents.

One of these types of loans is personal loans against mutual funds.

Mutual fund loans have been able to gain quite a bit of traction over the last few years because of their convenience.

What better idea than to borrow a loan against your mutual fund portfolio without even diluting it?

So how does this work? Are you eligible to borrow a personal loan against your mutual fund portfolio, and should also sign up?

Well, here’s a detailed analysis.

Mutual Fund Loans: An Introduction

Building a mutual fund portfolio is a process that requires hard work and an understanding of the market. Now of course, building a portfolio also means that you wouldn’t want to liquidate it every time you have a requirement for some money.

That’s where mutual fund loans play an important role.

Mutual fund loans are a form of digital lending that has gained massive popularity due to how easy and convenient this entire concept is.

Having a mutual fund portfolio allows you to borrow a loan against it and pay it back in installments at a certain percentage of interest rate. That is the entire concept of mutual fund loans.

Now do you absolutely need it?

Well, that depends on your preferences and your requirements.

But is it better than traditional loan concepts?

A hundred percent!

Benefits of Personal Loan Against Mutual Funds

1. Access to money without liquidating your portfolio: One of the primary advantages of opting for a personal loan against mutual funds is the ability to access liquidity without liquidating your investments. By pledging mutual fund units as collateral, you retain ownership of your investments while unlocking funds for immediate financial requirements.

2. Lower Interest Rates: Personal loans against mutual funds often come with lower interest rates compared to unsecured personal loans. The presence of collateral reduces the lender’s risk, leading to more favorable terms for borrowers in terms of interest rates and repayment options.

3. Quick Approval and Disbursement: Because of how your mutual fund units serve as collateral, the approval and disbursement process for these types of loans is also typically faster compared to traditional loans. This makes them an attractive option for individuals in need of urgent funds.

4. Maintaining Investment Exposure: By opting for a personal loan against mutual funds, investors can maintain their exposure to the financial markets and potential returns generated by their investment portfolios. This is especially beneficial during market upswings when liquidating investments may not be advisable.

Considerations Before Availing a Personal Loan Against Mutual Funds

Even though a mutual fund loan is an attractive option as compared to traditional investments, there are still a variety of considerations that you need to consider before choosing this option for yourself.

Here are some of the most important ones:

1. Loan-to-Value Ratio

The financial institution or the lender that you’re approaching to borrow this loan from determines the loan amount based on the Loan-to-Value (LTV) ratio.

In most cases, the LTV ratio ranges from 50% to 80% of the market value of the pledged mutual fund units. 

This means that if you have a portfolio of Rs 10 Lac, you can expect to borrow a loan amount between Rs 5 and Rs 8 Lacs. But then again, it depends on the lender.

Understanding this ratio allows you to borrow the maximum loan amount that you can avail of against your portfolio.

2. The impact on your portfolio

Even though you’re still earning returns on your portfolio after pledging it, using it as collateral means a temporary lock-in period.

This lock-in period is established on the units that you can’t sell till the loan against your portfolio is repaid.

Borrowers need to assess the impact of this lock-in period on their investment strategy and portfolio management.

3. Risk of Margin Calls

One of the most common (and known) things about the investment market is the uncertainty that lingers on the markets.

Market fluctuations are common.

However, in volatile market conditions, the value of mutual fund units used as collateral may also fluctuate. 

If the value falls below a certain threshold (commonly known as the maintenance margin), borrowers may face margin calls, requiring additional collateral or loan repayment to meet lender requirements.

4. Interest Rates

An attractive feature of loans on mutual funds is the fact that they usually have lower interest rates in general as compared to other types of loans.

However, lenders and lending platforms also have different types of interest rates that you (should) evaluate.

At 50Fin, you’ll find that we have an interest rate of just 10.5% p.a. for loans against mutual funds.

Plus, there are no additional charges for foreclosing the loan as well.

Practical Applications of Personal Loans Against Mutual Funds

Your purpose of borrowing any kind of loan for any reason is entirely your business.

However, people also wonder whether their reason for borrowing a loan against their mutual funds is a reason enough to do so in the first place.

The versatility of personal loans against mutual funds makes them suitable for various financial needs. Here’s why most investors borrow a loan against mutual funds in the first place:

  1. Emergency Expenses: During unforeseen circumstances such as medical emergencies or urgent financial requirements, a personal loan against mutual funds provides quick access to funds without disrupting long-term investment plans.
  2. Debt Consolidation: Borrowers can use mutual fund loans to consolidate high-interest debts into a single, manageable loan with lower interest rates. This reduces overall interest expenses and simplifies debt repayment.
  3. (Un)expected Projects: Renovation, vacations, funding certain projects, or anything else that demands money all of a sudden is a good enough reason to explore the mutual fund loan option without depleting savings or selling investments.
  4. Education and Professional Development: Financing education expenses or investing in career-enhancing courses become more accessible with these loans, promoting lifelong learning and skill development.
  5. Business Expansion: Entrepreneurs and business owners can leverage their mutual fund investments to secure funds for business expansion, working capital, or strategic investments, supporting growth objectives.

Are You Eligible to Borrow a Mutual Fund Loan?

Loans on mutual funds are a great tool to avail cash for yourself when needed.

However, depending from platform to platform and lender to lender, your eligibility also varies.

With 50Fin, you can borrow a loan with a minimum portfolio value of Rs 50,000.

The best part is that it just takes 7 minutes to approve the loan and 4 working hours to disburse it.

So if you’re planning to borrow a mutual fund loan, you know where to start.

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