Loan Against Mutual Funds: Which Makes More Sense—Term Loan or Overdraft?

You might already know that you can tap into your mutual fund investments without selling them, all thanks to the Loan Against Mutual Funds (LAMF) facility. But here’s something that often flies under the radar: there are two main ways to go about it—Term Loans and Overdraft Facilities. 

Each approach offers its own set of perks and pitfalls. In this blog, we’ll explore these two financing options and help you decide which route aligns best with your financial situation. 

Let’s dive in!

What Exactly Is a Term Loan Against Mutual Funds?

A Term Loan is a lump-sum amount you borrow for a set duration—say 1, 3, or even 5 years. You pledge your mutual fund units as collateral, and the lender sanctions a loan based on the current market value of those units. You repay the borrowed sum plus interest in regularly scheduled installments (often EMIs, or Equated Monthly Installments).

The Process of Getting a Term Loan Against Mutual Funds

Here's a look at how a typical Loan Against Mutual Funds (LAMF) application unfolds. It’s surprisingly straightforward—especially when done through a digital platform.

Initial Inquiry & Eligibility Check: Confirm your bank or NBFC offers loans against mutual funds and verify basic eligibility criteria (like age, credit score, etc.).

Documentation & KYC: Provide proof of identity, address, and mutual fund ownership (e.g., a folio statement or Demat account details).

Valuation of Mutual Funds: The lender calculates the loan-to-value (LTV) ratio based on the Net Asset Value (NAV) of your mutual fund units.

Approval & Sanction Letter: Once approved, you receive a sanction letter detailing the loan amount, interest rate, and tenure.

Pledging Your Units: You sign documents (or authorize digitally) to pledge your mutual fund units as collateral. These units are then marked “lien” or “pledged” in the registrar or Demat records.

Disbursement of Funds: The lender credits the approved amount to your bank account—usually as a lump sum.

Repayment (EMIs or Fixed Schedule): You pay back the principal plus interest over the agreed term, typically through Equated Monthly Installments (EMIs).

Loan Closure & Release of Pledge: After full repayment, the lien on your mutual fund units is removed, and you regain full rights to your investments.

With Finsire’s LAMF stack [CAMS, KFintech, and MFCentral], this entire journey—from application to approval—can be done end to end digitally and wrapped up in under five minutes. All your mutual fund details are fetched directly from RTAs, and pledging is handled seamlessly online, letting you access funds without cumbersome paperwork.

What Does the Interest Rate Depend On For Term Loan Against Mutual Funds?

In many cases, lenders set a single interest rate for all applicants seeking a loan against mutual funds—especially for equity-based funds at around 50% Loan-to-Value (LTV) and for debt-based funds at around 80% LTV. 

Since these loans are secured by your investment portfolio, lenders already have a strong cushion to mitigate risk. As a result, they often don’t differentiate much across individual borrowers, keeping the process uniform for everyone.

For you, the borrower, this can be a win-win:

• Straightforward Rates: You won’t typically face much variation in pricing.
• Minimal Paperwork: With standard terms in place, you spend less time comparing offers and more time focusing on your financial goals.
• Simple Fee Structure: Processing fees are usually consistent, making it easier to budget your total loan cost.

When Does a Term Loan Against Mutual Funds Make Sense?

Even if you qualify for a Term Loan, it’s worth asking if it aligns with your financial situation. Below are scenarios and borrower profiles that tend to benefit most.

Planned, One-Time Expenses

• If you have a clear-cut need—like home remodeling, wedding expenses, or paying off an existing high-interest debt—Term Loans offer a lump sum to get the job done.
• Having a defined project and budget helps ensure you don’t borrow more than you need.

Stable Cash Flow

• Salaried professionals or individuals with predictable monthly income can comfortably handle fixed EMIs.
• This consistency makes it easier to plan around a set monthly repayment without straining your budget.

Preference for Predictability

• If you don’t like surprises and appreciate a clear start and end date, a Term Loan’s EMI structure is straightforward. You always know how much is due and when you’ll be debt-free.

Discipline Over Flexibility

• Some borrowers thrive on set deadlines and are less tempted to draw more credit than necessary.
• A Term Loan sets a definite boundary, whereas an Overdraft can tempt you to keep borrowing periodically.

What Exactly Is an Overdraft Against Mutual Funds?

An Overdraft (OD) against mutual funds is essentially a credit line secured by your investment portfolio. Instead of receiving one lump-sum payment, your lender assigns a maximum borrowing limit based on the current market value of your pledged mutual fund units. You can then withdraw funds as needed—paying interest only on the amount you actually use.

• Flexibility: Dip into your overdraft limit whenever you need and repay any portion any time.
• Secured by Mutual Funds: Similar to a Term Loan, your mutual fund units are pledged, and you maintain ownership while they remain under lien.

The Process of Getting an Overdraft Against Mutual Funds

Much like a Term Loan, getting an Overdraft against mutual funds can be a largely digital and streamlined experience, especially with platforms that simplify RTA (Registrar & Transfer Agent) data fetching and online pledging.

Initial Inquiry & Eligibility Check: Verify if your bank or NBFC offers an overdraft facility against mutual funds. Confirm basic eligibility criteria like minimum portfolio value, credit score, etc.

Documentation & KYC: Provide standard identity proof, address proof, and evidence of mutual fund ownership (e.g., a recent Demat statement or folio statement).

Valuation of Mutual Funds: The lender calculates the eligible credit limit based on the NAV (Net Asset Value) and the allowable Loan-to-Value (LTV) ratio (often around 50% for equity funds and up to 80% for debt funds).

Approval & Overdraft Limit Sanction: Once approved, you receive an official letter detailing your maximum overdraft limit, interest rate, and any applicable fees (like an annual or setup fee).

Pledging Your Units: You sign or digitally authorize the pledge of your mutual fund units as collateral. A lien is then marked against these units in the records of the registrar or your Demat account.

Accessing Funds: You’re given an overdraft account linked to your primary bank account. You can withdraw up to the sanctioned limit as needed—for instance, using online transfers or checks.

Interest on Utilized Amount: Crucially, interest is charged only on the portion of the overdraft you’ve actually withdrawn, and only for the duration that amount remains outstanding.

Repayment & Renewal You can repay any or all of the borrowed amount at any time to reduce interest costs. At the end of the agreed overdraft period (often 1 year), you may need to renew the facility or close it out.

With Finsire’s LAMF stack [CAMS, KFintech, and MFCentral], the entire OD setup—from application to sanction—can also be done digitally, often in minutes. Your mutual fund data is directly fetched from RTAs, and pledging is handled seamlessly online, giving you flexible access to funds without traditional paperwork hassles.

What Does the Interest Rate Depend For Overdraft Against Mutual Funds?

Although an overdraft typically grants more flexibility than a term loan, the underlying factors influencing the interest rate are quite similar:

Unified Rate Structure: Many lenders apply a single rate (or a narrow band of rates) for overdraft against equity funds and a separate one for debt funds. Much like term loans, they often keep it uniform because the loan is secured at a conservative LTV.

Usage-Based Interest: The principal difference is that interest applies only on the utilized amount. You might see a nominally higher interest rate compared to a term loan, but if you’re not using the full limit constantly, your total interest expense could be lower in practice.

When Does an Overdraft Against Mutual Funds Make Sense?

Below are scenarios and borrower profiles that tend to benefit most.

Uncertain or Recurring Needs

If you anticipate multiple or sporadic expenses—say business overheads, project-based costs, or periodic personal obligations—an overdraft’s flexibility can be a lifesaver.

Irregular Income Streams

Freelancers, consultants, and business owners often face fluctuating cash flows. With an overdraft, you can draw funds to cover shortfalls, then repay when you have surplus income.

Preference for Pay-as-You-Use

If you don’t want to pay interest on an entire lump sum you might not fully use, an overdraft’s “interest-on-the-utilized-amount” model keeps costs efficient.

No Rigid EMI Structure

Some borrowers prefer not to be locked into a monthly EMI. Overdrafts let you reduce or clear the outstanding amount in any proportion at any time.

Low Paperwork, High Control

Once the limit is set, you can borrow, repay, and borrow again without reapplying or submitting fresh documents—ideal for people who value speed and convenience.

Wrapping It Up

Choosing between a Term Loan and an Overdraft when you’re taking a loan against your mutual funds really boils down to how you plan to use the money and how comfortable you are with repayment flexibility.

• If you want a set path and love the certainty of EMIs, Term Loan all the way.
• If you thrive on flexibility, have variable cash flows, or anticipate multiple smaller borrowing needs, Overdraft might be your best friend.

Above all, keep a close eye on your mutual fund portfolio’s performance and any changes in interest rates or fees. It’s crucial to read the fine print, or better yet, talk to a trusted advisor who can tailor a solution that suits your unique financial situation. That way, you can tap into your mutual fund’s value without giving up its growth potential—and that’s a win-win in our books!

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