List of Top 10 Banks Offering Loans Against Mutual Funds in 2024

Jul 15th 2024
LAMF
Loans Against Mutual Funds

Financial emergencies often require immediate access to funds. While you may turn to your savings for assistance, withdrawing money from investments can incur penalty charges. Redeeming stocks or mutual funds may also disrupt your financial goals and potentially lead to long-term loss of wealth generation. 

Another option for addressing a financial crisis is obtaining loans, which can be either secured or unsecured. In the case of secured loans, you can utilize your mutual funds as collateral. In this article today, we will look for some popular banks and NBFCs that offer loans against mutual funds. In the process, we will also answer some of your important queries regarding loans against mutual funds. 

What is the Definition of Loans Against Mutual Funds (LAMF)?

When you opt for a digital loan against mutual funds, you are essentially using your mutual fund units as a guarantee for the loan. The lender will keep your mutual fund units as security until you have repaid the loan. It is important to note that your mutual funds will still generate returns, but you won’t be able to access or sell them while they are pledged to the lender. 

Banks and financial institutions allow you to borrow in the range of 50% to 90%$ of the value of your equity mutual fund schemes in your portfolio. The value of each scheme is determined by multiplying the number of units by the scheme’s NAV. The portfolio value is calculated based on the total value of all equity mutual fund schemes. 

Introducing LAMF As a Solution During Financial Distress

Taking out a loan against mutual funds is a great way to address short-term financial needs without impacting long-term investment goals. The swift processing, competitive interest rates and continued investment growth make it an appealing choice for numerous investors. Nevertheless, it is crucial to assess the potential risks and confirm that this type of loan aligns with your overall financial strategy. 

Understanding and leveraging options like loans against mutual funds can provide strategic advantages in a changing financial environment. Such loans offer both liquidity and stability, bridging the gap between immediate requirements and long-term aspirations. They can be used for various needs such as medical emergencies, education, business opportunities and other urgent needs. 

Top Banks and Financial Institutions Offering Loans Against Mutual Funds in India

Listed below are the names of top Indian banks and financial institutions that offer loans against mutual funds - 

Bank/Institution

Loan Percentage

Interest Rate

Additional Details

HDFC Bank

Up to 50% for Equity Mutual Funds; Up to 80% for Debt Mutual Funds

Starts from 9.75% p.a.

Digital application process, funds are available instantly

ICICI Bank

Up to 50% for Equity Mutual Funds; Up to 80% for Debt Mutual Funds

10-11% p.a.

Overdraft facility, paperless disbursement 

Axis Bank

Up to 85% for approved Mutual Funds

9.5-11% p.a.

No prepayment charges and quick disbursal

State Bank of India (SBI)

Up to 50% for Equity/Hybrid/ETF MF; Up to 75% for Debt/FMP MF

Starts from 8.50% p.a.

Minimum loan amount of Rs 25,000

Tata Capital

Up to 80% for Debt Mutual Funds

7-15% p.a.

Loans from both banks and NBFCs are available

Kotak Mahindra Bank

Up to 50% for Equity Mutual Funds; Up to 80% for Debt Mutual Funds

Starts from 9% p.a.

Flexible repayment options and quick processing

Bajaj Finserv

Up to 80% for Debt Mutual Funds

9.25-12% p.a.

High loan amounts and easy application process

IDFC First Bank

Up to 50% for Equity Mutual Funds; Up to 75% for Debt Mutual Funds

8.5-11.5% p.a.

Customizable loan options and competitive interest rates

IndusInd Bank

Up to 50% for Equity Mutual Funds; Up to 80% for Debt Mutual Funds

Starts from 10% p.a.

Quick disbursement, flexible tenure options

HDB Financial Services

Up to 70% for Mutual Funds

11-14% p.a.

Loan against multiple securities, easy documentation

*Data mentioned in the table above can change. You are requested to crosscheck all the details from the respective bank’s official site before finalizing the best bank for your needs. 

Important Terminologies Related to Loans Against Mutual Funds

Loans against mutual funds provide a way to access liquidity without having to sell off your investments. Here are some key terms to understand while dealing with LAMF - 

  • Loan-to-Value Ratio (LTV): It sets a limit on the amount you can borrow based on your mutual fund holdings. It is expressed as a percentage and determined by the lender. As an illustration, an LTV of 75% means you can borrow up to 75% of the present market value of your mutual funds. 
  • Margin: It refers to the gap between the loan amount provided and the current market value of the mutual fund units held as collateral. 
  • Margin Call: It occurs when the value of the pledged mutual funds drops below a specified level determined by the lender. To address this, you will have to inject more funds or sell some of your mutual fund units to bring the loan-to-value ratio back to the required level. It is important to stay informed about the market and the terms of your margin account to avoid potential margin calls. 
  • Net Asset Value (NAV): It is a crucial metric that represents the per-unit market value of a mutual fund scheme and is calculated daily. Lenders often reference the NAV when assessing the current value of your mutual fund holdings and your eligibility for a loan. This metric provides transparency and insight into the overall value of your investment, impacting financial decisions and opportunities. 
  • Pledged Units: They serve as a form of security for the loan agreement, assuring the lender that there is a tangible asset backing the borrowed funds. It is a common practice for lenders to require collateral to mitigate their risk in case the borrower defaults on the loan. This arrangement gives the lender a claim on the pledged units in the event of non-payment. 
  • Exit Load: It is a mutual fund redemption fee which can significantly impact your investment returns, especially if you need to sell units to cover a margin call. It is important to be aware of this fee and consider it when making investment decisions. 
  • Lien: It is a legal claim that a lender places on your pledged mutual fund units, which prevents you from selling or transferring them without the lender’s approval. It serves as a form of security for the lender to ensure repayment of the loan. If the borrower defaults on the loan, the lender may have the right to sell the mutual fund units to recover their funds. 
  • Foreclosure Threshold: This is a crucial factor in determining when a margin call will be triggered due to a drop in the value of the pledged units. It is important to note that this percentage can vary based on the lender as well as the type of mutual fund involved. Understanding this threshold is essential for managing the risks associated with margin trading effectively. 
  • Open-Ended vs. Closed-Ended Funds: Liquidity and redemption options vary between open-ended and closed-ended funds. Open-ended funds allow for redemption on any business day, providing flexibility for investors. On the other hand, closed-ended funds may have limitations on redeeming units, potentially affecting one’s ability to meet a margin call. 
  • Haircut: It involves reducing the net asset value of the units you have pledged by a certain percentage. This is done to mitigate potential volatility and facilitate the sale of the units in the event of default. As a result, the loan amount available to you is effectively decreased. 

Loans Against Mutual Funds: Step-by-Step Application Process

Here is a brief overview of the step-by-step application process to apply for loans against mutual funds as we have already discussed the detailed process in our - How to apply for a Loan Against Mutual Funds article. Check the brief steps below - 

  1. Login/Signup
  2. Navigate to the LAMF section 
  3. Apply: Choose a loan partner (Abhi Loan or recommended).
  4. Verification: Enter details, receive OTP and confirm.
  5. Review & Apply: Check the eligible loan amount and apply if meets the requirements.
  6. Complete the application on the partner website (might require additional info).
  7. Track Status: Monitor progress on the Investkraft dashboard.

What Benefits Will You Have If You Apply for a Loan Against Mutual Funds?

Loans against mutual funds offer several benefits such as - 

  1. Accessing funds with ease and speed is a major benefit of online processing. Through this method, one can quickly obtain a loan by pledging mutual fund units and setting an overdraft limit, saving valuable time compared to traditional loan processing. 
  2. The loan interest can be paid monthly by crediting the loan amount and it is based on the utilized loan amount rather than the total sanctioned amount. This flexible structure helps in managing and minimizing interest costs, providing more control and ease in repayment. 
  3. Loans against mutual funds offer faster availability of funds, often within a day, compared to other types of loans with longer waiting periods. This makes them well-suited for addressing urgent financial needs. 
  4. The lower interest rate on loans against mutual funds makes them a more affordable option compared to personal loans and credit card loans. This leads to lower EMIs, making it easier for borrowers to manage their repayments. 
  5. One major advantage of getting a loan against mutual funds is that investors can secure the loan without selling or cashing out their mutual fund investments. The units stay in their demat account, allowing for continued investment and potential growth. 

Are There Any Risks Associated with Taking Loans Against Mutual Funds?

Many Indian investors opt for loans against mutual funds as it offers a more affordable financing option compared to other credit sources. However, it is important to consider the risks involved in this decision, as it can impact the overall performance of mutual fund investments. It is essential to carefully assess the potential downsides before choosing this route. 

  • Borrowing against mutual funds carries risk due to market volatility. If the fund’s value drops, it can lead to difficulties in repaying the loan and potential losses through selling off MF units. 
  • LTV ratio is a key risk factor. If NAV decreases, you could owe more than what your investments are worth. 
  • Loan interest rates on mutual funds are not fixed, they fluctuate based on market conditions. Sudden rate hikes can increase EMIs or extend loan tenure, leading to more financial burdens. 

For more pointers associated with risks, you can check our detailed article - Key Considerations Before Opting for a Loan Against Mutual Funds. 

Conclusion

It is important to recognize that while LAMFs can be advantageous, it is equally important to be aware of the potential risks involved. Market volatility can impact the value of your mutual funds, potentially leading to margin calls or requiring you to sell units to fulfil loan responsibilities. Before choosing a LAMF, it is essential to thoroughly evaluate your risk tolerance and seek advice from a financial advisor. 

Understanding loans against mutual funds and their intricacies is crucial for making informed financial choices, especially in challenging times. To assist you, our comprehensive resources cover various aspects of LAMFs, such as application processes and in-depth risk considerations. By utilizing these resources, you can make strategic decisions that protect and enhance your financial well-being.

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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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Abhik's diverse background empowers him to deliver insightful content across a wide range of subjects. Whether you're seeking engaging explainer pieces on the latest financial trends, informative guides to organic food choices, or captivating travelogues, Abhik has the expertise to craft content that resonates with your audience.

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