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Loans Against Mutual Funds

Eligibility Criteria for Loan Against Mutual Funds

When financial needs arise, and you have invested in mutual funds, one option to consider is availing a loan against your mutual fund holdings. It allows you to leverage your investments without the need to liquidate them. However, before you proceed, it’s essential to understand the eligibility criteria involved in obtaining a loan against your mutual funds. In this article, we will explore the key factors that determine your eligibility and shed light on the process.

1. Type of Mutual Funds

The first eligibility factor is the type of mutual funds you hold. Lenders typically have a list of approved mutual funds against which they offer loans. These funds are carefully selected based on their liquidity, track record, and other factors. Before applying for a loan, ensure that your mutual fund is eligible for such borrowing.

2. Minimum Mutual Fund Value

Lenders usually set a minimum value for the mutual funds against which they provide loans. This value varies from lender to lender and can range from a few thousand to lakhs of rupees. The loan amount you can avail will depend on the value of your mutual funds, and it’s important to meet the minimum threshold specified by the lender.

3. Loan-to-Value Ratio (LTV)

The Loan-to-Value ratio is a crucial factor in determining the loan amount you can avail. LTV is the percentage of the mutual fund value that a lender is willing to lend. Generally, the LTV ratio for loan against mutual funds ranges from 50% to 80%. For example, if your mutual fund has a value of ₹10 lakhs and the LTV ratio is 60%, you can avail a loan of up to ₹6 lakhs.

4. Creditworthiness

Like any other loan, your creditworthiness plays a significant role in determining your eligibility. Lenders will assess your credit score, repayment history, and overall financial stability to gauge your ability to repay the loan. A good credit score and a clean credit history increase your chances of loan approval and may even result in more favorable terms and interest rates.

5. Tenure and Interest Rates

Loan against mutual funds typically comes with a fixed tenure, ranging from a few months to a few years. The interest rates charged by lenders vary and depend on various factors such as your creditworthiness, the tenure of the loan, and the overall market conditions. It’s essential to compare interest rates from different lenders to ensure you’re getting the best deal.

FAQs

The maximum amount that you can get as a loan against mutual funds depends on the value of your mutual fund units. Different mutual fund companies have different loan to value (LTV) ratios, which determine the maximum loan amount that you can get.

If you are unable to repay the loan, the mutual fund company will sell your units to recover the loan amount.

Yes, you can continue to invest in mutual funds even if you have taken a loan against them. However, you need to make sure that you have sufficient units to cover the loan amount.

Conclusion

Loan against mutual funds provides a convenient way to access funds while keeping your investments intact. Before applying for such a loan, it’s crucial to understand the eligibility criteria set by lenders. Consider factors such as the type and value of your mutual funds, creditworthiness, LTV ratio, interest rates, and necessary documentation. By meeting these criteria and choosing the right lender, you can leverage your mutual fund investments wisely and meet your financial needs effectively.

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