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Loans Against Mutual Funds

Eligibility Criteria for Loan Against Mutual Funds

No matter what you need to borrow money for, borrowing against your own investments is probably one of the smartest moves you can make. 

Loans on your mutual funds are one of the popular methods of borrowing money against your own investments.

Mutual fund loans offer a variety of advantages and simplify the borrowing process much more than traditional loans.

This method offers several advantages, including lower interest rates and continued growth of your investment portfolio. 

But before you borrow a loan against your mutual funds, the first question is – Are you even eligible to do so?

Here’s a guide to walk you through the eligibility process of loan against mutual funds.

Mutual Fund Loans: An Introduction

Loans against mutual funds are exactly what they sound like – borrowing a loan against your mutual fund’s portfolio.

This is a secured loan where you pledge your mutual fund units as collateral.

Essentially, the financial institution where you’re borrowing from holds these units until you repay the loan. 

This option is particularly appealing because it allows you to meet your financial needs without disrupting your investment strategy.

Advantages of Loan Against Mutual Funds

Borrowing a loan on your mutual fund portfolio is one of the best forms of loans – only because you’re borrowing against what you already own

On top of that, here are some of the most promising highlights of loans on mutual funds:

  1. Lower Interest Rates: Compared to personal loans or credit cards, loans against mutual funds typically offer lower interest rates because they are secured.
  2. Continued Investment Growth: Your mutual fund investments continue to grow and earn dividends or interest even while they are pledged.
  3. Flexibility: You can choose to repay the loan in easy instalments or pay it off in one go without any prepayment penalties.
  4. Quick Processing: These loans usually have faster approval and disbursement times because they are secured against your investments.

Who Can Apply For a Loan Against Mutual Funds?

Understanding who is eligible for a loan against mutual funds is the first step in determining if this financial product is right for you. 

Here’s a breakdown of the common eligibility criteria for mutual fund loans:

1. Age Criteria

Most banks and financial institutions require applicants to be at least 18 years old. And not more than 65 years old.

To borrow a loan on mutual funds, you need to have a portfolio that you also have ownership of.

This range can vary slightly depending on the lender.

2. Type of Mutual Funds

Not all mutual funds qualify for this type of loan. 

Typically, both equity and debt mutual funds are accepted, but the specifics can vary by lender. 

Some lenders might prefer more stable debt funds over volatile equity funds due to the lower risk involved.

3. Ownership and Documentation

To apply for a loan against mutual funds, you need to be the primary holder of the mutual fund units. 

Joint holders can also apply, but all parties involved must sign the loan agreement. 

You will need to provide documentation proving your ownership of the mutual fund units, usually in the form of a statement from the mutual fund company.

4. KYC Compliance

You must be KYC compliant to be eligible for a loan against mutual funds. 

This involves submitting documents that verify your identity and address, such as a PAN card, Aadhaar card, passport, voter ID, or driving license. 

Financial institutions use these documents to confirm your identity and reduce the risk of fraud.

What is the Financial Criteria for Mutual Fund Loans?

There are a few considerations that you need to be aware of before you can borrow a loan on your mutual fund portfolio.

1. Your Credit Score

Most types of loans require you to have a good credit score.

But that’s not the case in mutual fund loans.

Since the loan is being borrowed against your own portfolio (which already belongs to you), there’s no creditworthiness required to assess.

This means you can borrow a mutual fund loan without a credit score too.

2. Loan Amount and LTV Ratio

The loan amount you can borrow against your mutual funds depends on the Loan-to-Value (LTV) ratio.

This ratio is a percentage of the mutual fund’s value that the lender is willing to offer as a loan. 

Typically, this ratio ranges from 50% to 80%. 

Pledging Process

To secure a loan against your mutual funds, you will need to pledge your mutual fund units to the lender. Here’s a simplified step-by-step process:

  1. Application: Apply for a mutual fund loan by signing up with the lender and submitting the required forms and documents. Since you’re pledging your mutual fund portfolio, the entire application process is digital and requires no physical paperwork. 
  1. Pledge Request: Submit a pledge request to your mutual fund company or through your Demat account if your funds are held in electronic form.
  2. Verification: The lender verifies your pledge request and processes the application.
  3. Disbursement: Once the pledge is confirmed, the loan amount is disbursed to your account.

Recommended: How to borrow a loan against mutual funds?

Repayment Terms

Repayment terms for loans against mutual funds are generally flexible. 

You can choose between different tenures, often ranging from 1 year to 5 years. 

Interest can be paid monthly, quarterly, or at the end of the tenure, depending on the agreement with the lender. 

50Fin allows you to foreclose your loan without any extra costs at all.

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

A loan against mutual funds can be a smart way to access funds while keeping your investments intact. 

Understanding the eligibility criteria is crucial to ensure a smooth application process. 

However, before you borrow, remember to assess your repayment capacity and compare offers from different lenders to make the best decision.

And if you’re planning to move forward with the loan application process, there’s no better way than to start it with 50Fin.

With an approval time of just 7 minutes, easy digital documentation, and no minimum CIBIL score required, it only makes sense to borrow your loan against mutual funds from 50Fin.

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