How to Choose the Best Bank for a Loan Against Mutual Funds 2024

Jul 15th 2024
LAMF
Loans Against Mutual Funds (LAMF)

Loan Against Mutual Funds or LAMF is a credit solution allowing borrowers to obtain funds using mutual funds as collateral. This option is handy for investors who need quick access to cash without selling their investments. 

If you have a strong MF portfolio that is providing a good long-term return, but suddenly find yourself in need of short-term funds for an emergency expense, there is an option to consider called Loan Against Mutual Funds (LAMF). In this, instead of selling your investments, you can opt for a loan against your mutual fund units. This allows you to meet your immediate financial needs while still earning returns from your mutual fund portfolio, without selling them.

Let us delve into the meaning, advantages and list of banks offering loans against mutual funds along with their interest rates. 

List of Top 10+ Banks Offering Loans Against Mutual Funds

Here are the popular Indian banks offering loans against mutual funds - 

Bank

Interest Rate

Loan Amount

Key Features

State Bank of India (SBI)

Starting from 8.50% p.a.

Up to 50% of NAV for equity, 80% for debt MFs

Minimum documentation, quick approval

HDFC Bank

Starting from 7.10% p.a.

Up to 50% of NAV for equity, 80% for debt MFs

Lower interest rate, easy online application process

Kotak Mahindra Bank

Starting from 8.50% p.a.

Up to 50% of NAV for equity, 80% for debt MFs

Flexible repayment options, quick disbursement

ICICI Bank

Starting from 9.00% p.a.

Up to 50% of NAV for equity, 80% for debt MFs

Insta loan facility, paperless disbursement

Bajaj Finance

Up to 20% p.a.

Up to 50% of NAV for equity, 80% for debt MFs

Higher loan limits, flexibility in repayment

Axis Bank

Starting from 10.00% p.a.

Up to 50% of NAV for equity, 80% for debt MFs

Easy documentation, quick processing

IDFC First Bank

Starting from 9.00% p.a.

Up to 50% of NAV for equity, 80% for debt MFs

Competitive interest rates, hassle-free processing

Punjab National Bank (PNB)

Starting from 8.50% p.a.

Up to 50% of NAV for equity, 80% for debt MFs

Attractive interest rates, simplified application process

Bank of Baroda

Starting from 8.75% p.a.

Up to 50% of NAV for equity, 80% for debt MFs

Flexible loan tenure, quick disbursement

Yes Bank

Starting from 9.25% p.a.

Up to 50% of NAV for equity, 80% for debt MFs

Convenient online application, faster loan approval

Union Bank of India

Starting from 9.00% p.a.

Up to 50% of NAV for equity, 80% for debt MFs

Quick processing, competitive interest rates

IndusInd Bank

Starting from 9.50% p.a.

Up to 50% of NAV for equity, 80% for debt MFs

Easy documentation, flexible repayment options

Canara Bank

Starting from 8.75% p.a.

Up to 50% of NAV for equity, 80% for debt MFs

Simplified loan process, attractive interest rates

Standard Chartered Bank

Starting from 10.25% p.a.

Up to 50% of NAV for equity, 80% for debt MFs

Competitive rates, easy online and offline application process

 

Essential Considerations While Choosing a Bank That Offers Loans Against Mutual Funds (LAMFs)

When accessing funds (loans) without selling mutual fund investments, it is crucial to choose the right bank for your needs. Key factors to consider include - 

  • Loan-to-Value Ratio (LTV) Ratio: Banks usually lend a percentage of the value of your mutual fund, not the entire amount, which is known as the “Loan-To-Value” (LTV) ratio. The LTV ratio can differ among banks and types of funds and a higher LTV ratio means you can borrow more but also raises the risk of a margin call.
  • Interest Rates: LAMF interest rates can be compared across different banks. Generally, they are lower than personal loan interest rates but higher than home loan interest rates.
  • Eligible Mutual Funds: Check the eligibility of your funds for LAMF at the specific bank where you intend to apply for the loan. Not all banks accept all types of mutual funds as collateral and it is important to ensure that your funds are eligible before proceeding with the application.
  • Margin Calls and Maintenance: In market downturns, mutual fund values may decrease, leading to margin calls from the bank. These calls require extra deposits or the selling of units to maintain the LTV ratio. It is important to know the bank’s margin call policy and determine the amount of buffer you have before facing a margin call.
  • Additional Fees: Be cautious of any additional fees that may be associated with the loan, such as processing fees, foreclosure charges or prepayment penalties.
  • Bank Reputation and Customer Service: Consider selecting a renowned bank known for its long-standing commitment to providing low maintenance fees. It is important to thoroughly examine their customer service track record to guarantee a seamless banking experience.
  • Online Account Management: Inquire about the bank’s online account management features specifically for their LAMF accounts.

What Should I Do After Shortlisting a Bank for LAMF?

The process of obtaining a loan against mutual funds can vary depending on the lender or platform you select. However, several common and important steps typically occur after shortlisting a bank for this type of loan. These steps include - 

  1. Application Submission: To submit your application, all you need to do is sign an e-agreement and provide the necessary authorization. This digital process eliminates the need for any physical paperwork, making it convenient and efficient. Just pledge your mutual fund portfolio and complete the required steps hassle-free.  
  2. Loan Disbursement: After the verification process and confirming the collateral, the loan amount will be directly disbursed to your registered bank account. Typically, Investkraft processes loan disbursement within a few hours after successful verification. 

Conclusion

A Loan Against Mutual Funds (LAMF) provides a convenient way for investors to obtain immediate funds without impacting their long-term investment strategies. By utilizing the value of their mutual funds, individuals can address unplanned expenses while remaining connected to potential market growth. It is important to compare LTV ratios, interest rates and associated costs from various financial institutions to secure the best terms. With strategic foresight and a trusted lender, a LAMF can serve as a crucial resource for managing short-term financial requirements while progressing towards long-term financial goals. 

Frequently Asked Questions (FAQs)

Q1: Are all my mutual funds eligible for a loan against mutual funds?

A: Banks usually have strict criteria for accepting mutual funds as collateral, including restrictions on fund categories, expense ratios, and lock-in periods. It's essential to verify with the bank whether your specific mutual fund holdings meet their eligibility requirements.

Q2: Can I negotiate the loan terms with the bank?

A: Negotiation may not always be an option, but it could be on the table for borrowers with a solid credit history and a substantial loan amount. It's important to consider discussing potential negotiation opportunities with your chosen bank.

Q3: What happens to my mutual funds while I have a loan against them?

A: When you use your mutual fund units as collateral for a loan, the bank will limit your ability to sell or trade those units until the loan is fully repaid. This means that you won't be able to access the funds tied to those specific units until the loan agreement is fulfilled. It's important to carefully consider this restriction before using your mutual fund units as collateral for a loan.

Q4: Are there any government regulations governing loans against mutual funds?

A: In various jurisdictions, financial authorities regulate loans against mutual funds to safeguard borrowers and promote equitable lending practices. Therefore, it is advisable to thoroughly investigate the regulations in your specific jurisdiction.

Q5: Can I use a loan against mutual funds to invest in other assets?

A: It's important to understand that while the loan proceeds can technically be used for any purpose, it's generally not advisable to use them to invest in another asset class. This is because doing so can create a double leverage situation, which in turn amplifies potential losses.

Q6: What if I want to invest additional funds into the mutual funds I've pledged as collateral?

A: You can enhance your portfolio value and potentially raise your borrowing limit by investing additional amounts into the same mutual fund or a different one, even though the pledged units are restricted during the loan term.

Q7: I'm about to inherit a large sum of money. Can I use a loan against mutual funds to access some of the inheritance early?

A: It is not recommended to rely on this approach. Inheritance legalities can be time-consuming, and using a loan to fill the gap may be risky. Consider other alternatives such as a temporary loan from a trusted friend or family member with clear terms.

 

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Author: Abhik Das

Abhik Das is a versatile content writer with over 5 years of experience crafting engaging and informative content across diverse industries. His expertise spans the fields of ed-tech, pharmaceuticals, organic food, travel, sports, and finance.

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