A Loan Against Mutual Funds (LAMF) is a type of secured loan where you pledge your mutual fund units as collateral to borrow money.
Instead of selling your mutual fund investments, you can leverage them to get liquidity while retaining ownership of your investments. The lender holds a lien on the mutual fund units until the loan is repaid. This type of loan is typically more affordable than unsecured loans like personal loans, as it carries a lower risk for the lender due to the collateral.
2. How does a Loan Against Mutual Funds work?
When you apply for a Loan Against Mutual Funds, the lender assesses the value of the mutual fund units you want to pledge. Based on the market value of your funds and the lender’s Loan-to-Value (LTV) ratio policy, a loan amount is sanctioned.
The LTV ratio generally ranges between 50% to 80%, depending on the type of mutual fund (equity or debt). Once the lien is placed on your mutual fund units, the lender disburses the loan amount to your bank account. During the loan tenure, your mutual funds continue to earn returns, and you can repay the loan in instalments or in full. Once the loan is repaid, the lien on your mutual funds is removed, and you regain full control of the units.
3. Who can apply for a Loan Against Mutual Funds?
A Loan Against Mutual Funds can be availed by individual investors who hold mutual fund units. Typically, the following entities can apply:
Resident Individuals: Anyone who owns mutual funds in their name.
Joint Account Holders: If the mutual fund is held jointly, both parties can jointly apply.
HUF (Hindu Undivided Family): Members of a Hindu Undivided Family can avail loans against mutual funds held under the HUF.
NRIs (Non-Resident Indians): Some financial institutions may offer LAMF to NRIs, but this depends on the lender's policies. Before applying, check with the lender to ensure they offer LAMF for your specific type of ownership.
4. What are the eligibility criteria for applying for a LAMF?
The eligibility criteria for a Loan Against Mutual Funds can vary by lender, but generally, the following conditions must be met:
Age: The applicant should be at least 18 years old. Some lenders may have a higher minimum age requirement.
Mutual Fund Type: The mutual funds should be held in dematerialized (demat) form. The loan can be availed against equity mutual funds, debt mutual funds, or a mix, depending on the lender’s policies.
Fund Ownership: The mutual fund units should be in the name of the person applying for the loan. For joint holders, all parties need to agree to the lien marking.
KYC Compliance: The applicant must have completed KYC (Know Your Customer) formalities, as required by the lender.
Minimum Investment Value: Some lenders may set a minimum value for the mutual funds being pledged.
Creditworthiness: While LAMF is a secured loan, the lender may still check your credit score to assess overall repayment ability.
Lien Marking: You need to agree to place a lien on your mutual fund units in favor of the lender.
5. Can I apply for a LAMF online?
Yes, many financial institutions now offer the facility to apply for a Loan Against Mutual Funds online. The process typically involves the following steps:
Online Application: You can visit the lender's website or app and fill out an online application form with details about your mutual fund holdings.
KYC Verification: If your KYC (Know Your Customer) is not already completed, the lender may require you to upload necessary documents, such as PAN, Aadhaar, address proof, and income proof, for verification.
Demat Account Details: You will need to provide your demat account details as the mutual fund units need to be held in dematerialised form.
Lien Marking: Once you apply, the lender coordinates with the mutual fund house to mark a lien on the pledged units.
Approval and Disbursement: After evaluating your application, the lender sanctions the loan, and the amount is disbursed directly to your bank account.
6. How is the loan amount decided?
The loan amount you can get against your mutual funds depends on the current market value of the mutual fund units you’re pledging. Lenders typically follow something called a Loan-to-Value (LTV) ratio, which essentially means the percentage of your mutual fund's value that they are willing to lend you.
For example, if you have mutual funds worth ₹10 lakh, and the lender offers an LTV ratio of 60%, you can get up to ₹6 lakh as a loan.
The type of mutual funds you're pledging also plays a role. Equity funds generally have a lower LTV ratio because they are more volatile, while debt funds, which are considered safer, often have a higher LTV. So, the more stable the mutual fund, the higher the loan amount you can receive.
7. What is the minimum and maximum loan amount I can avail of?
Most lenders have their own set limits for how much you can borrow against mutual funds. The minimum loan amount can be as low as ₹50,000, but this varies depending on the lender. For example, some institutions may have a minimum limit of ₹1 lakh.
As for the maximum loan amount, this is primarily tied to the value of the mutual funds you’re pledging and the LTV ratio offered by the lender. Generally, the upper limit can go up to ₹5 crore or even higher, depending on your portfolio and the lender’s policies. However, do keep in mind that no matter the size of your mutual fund portfolio, the actual loan you’ll receive will be a percentage of the total value.
8. What are the accepted types of mutual funds for a loan?
Lenders typically accept both equity and debt mutual funds for loans. However, not all mutual fund schemes may qualify. Generally, here’s what’s usually accepted:
Equity Mutual Funds: These are funds that invest primarily in stocks. Due to their higher volatility, they might have a lower LTV ratio.
Debt Mutual Funds: These funds invest in fixed-income instruments like government bonds, corporate bonds, and other debt securities. Debt funds are considered less risky and often come with a higher LTV ratio.
Hybrid Funds: Some lenders also accept hybrid funds, which invest in a mix of equity and debt instruments.
Before applying, it’s important to check with the lender to see which specific funds they accept. They may also have restrictions based on the fund's performance or the size of the asset under management (AUM) in that fund.
9. Can I pledge both equity and debt mutual funds?
Yes, you can pledge both equity and debt mutual funds together. In fact, combining different types of funds is quite common, and it allows you to maximize your loan amount. Since debt funds typically offer a higher Loan-to-Value (LTV) ratio, pledging a mix of equity and debt can help you balance the risk and still get a substantial loan amount.
Let’s say you have both equity and debt funds in your portfolio. You could pledge your higher-risk equity funds alongside your more stable debt funds. The lender will calculate the LTV ratio separately for each type of fund and then decide the overall loan amount you are eligible for. This flexibility gives you more options when you need funds.
10. What is the Loan to Value (LTV) ratio for mutual fund loans?
The Loan-to-Value (LTV) ratio is the percentage of the value of your mutual fund units that the lender is willing to give you as a loan. It’s a key factor in determining how much money you’ll get.
For equity mutual funds, the LTV ratio is generally between 50% to 60%. This is because equity funds are more volatile; their value can fluctuate more widely, so lenders take a more cautious approach.
For debt mutual funds, which are considered safer and more stable, the LTV ratio can go up to 70% or even 80%. Debt funds have lower volatility, so lenders are more comfortable lending a higher percentage of their value.
Here’s an example: If you have ₹10 lakh in equity mutual funds and the lender offers an LTV of 55%, you can borrow up to ₹5.5 lakh. On the other hand, if you have ₹10 lakh in debt mutual funds and the LTV is 75%, you could borrow up to ₹7.5 lakh.
The exact LTV ratio will depend on the lender’s policies and the type of mutual fund you're pledging, so it’s a good idea to check these details before applying for the loan.
These explanations break down the technical details into a user-friendly format, making it easier for end users to grasp the core concepts of a Loan Against Mutual Funds.
11. How is the LTV ratio calculated?
The Loan-to-Value (LTV) ratio is a simple calculation that shows the percentage of the value of your pledged mutual funds that you can borrow as a loan. It’s calculated as:
For example, if your mutual funds are worth ₹10 lakh and the lender offers an LTV of 60%, you’ll be eligible for a loan of ₹6 lakh. The LTV ratio varies depending on the type of mutual fund:
Equity mutual funds (which are more volatile) usually have an LTV ratio of around 50% to 60%.
Debt mutual funds, considered more stable, may have an LTV as high as 70% to 80%.
The lender assesses the current market value of your mutual funds to calculate this, so the loan amount you get is directly linked to the performance of your investments at the time of application.
12. What documents are required to apply for a LAMF?
To apply for a Loan Against Mutual Funds (LAMF), you’ll need to submit some basic documents, which can usually be provided digitally. Here’s a general list of what’s typically required:
Proof of Identity: This could be your PAN card, Aadhaar card, passport, or voter ID.
Proof of Address: Documents such as an Aadhaar card, utility bills (electricity, water, or gas), passport, or driving license can be used.
PAN Card: This is mandatory in most cases for KYC verification.
Bank Account Details: You’ll need to provide details of the bank account where the loan amount will be credited.
Mutual Fund Statement: A statement of the mutual funds you wish to pledge, showing current holdings and values.
Demat Account Details: Since mutual funds are typically pledged in demat form, the lender will ask for your demat account information.
Signed Application Form: The lender may provide a specific form or digital application that needs to be filled and signed.
13. How long does it take to get approval for a LAMF?
The approval process for a Loan Against Mutual Funds is typically quick, especially if you apply online and your KYC (Know Your Customer) verification is already in place. Here’s a breakdown of the timeline:
Online Application: If you apply online, filling out the form and submitting documents can take just a few minutes.
KYC and Document Verification: If your KYC is already completed, the verification may take just a few hours. If not, it might take 1-2 days.
Lien Marking: The lender will place a lien (or hold) on your mutual fund units as collateral. This step is usually coordinated between the lender and the mutual fund company and can be accomplished in real time.
Loan Approval and Disbursement: Once the lien is marked, approval is often instant, and the loan amount is credited to your account. The entire process can take a few hours, depending on the lender and your mutual fund’s demat status.
14. Is my credit score considered for a LAMF?
Yes, but it’s not the main deciding factor. Since a Loan Against Mutual Funds is a secured loan, the primary collateral is your mutual fund investment, which reduces the risk for the lender. That said, lenders may still check your credit score as part of their standard due diligence process, particularly if you’re borrowing a large sum. A good credit score may help in smoother processing, while a poor score might result in additional scrutiny or slightly stricter terms.
However, since the loan is secured by your mutual funds, your credit score plays a smaller role compared to unsecured loans like personal loans or credit cards. If your investment is strong and the lender is confident in the value of your collateral, your credit score might not heavily impact your ability to get the loan.
15. Can I avail a loan against multiple mutual funds?
Yes, you can pledge multiple mutual funds to avail of a loan. In fact, pledging a mix of mutual funds (both equity and debt) can help you maximize the loan amount since different types of funds come with varying LTV ratios. By combining multiple mutual funds, you may be able to increase your total portfolio value, leading to a higher eligible loan.
For example, if you have equity funds worth ₹5 lakh and debt funds worth ₹5 lakh, the lender will calculate the LTV for each separately, often offering a higher LTV for the debt funds. This flexibility allows you to leverage a diversified portfolio to your advantage.
16. How is the loan disbursed?
Once your loan application is approved, the loan is disbursed directly into your bank account. The process is usually seamless, especially if you’re applying online. Here’s a quick breakdown of the steps:
Lien Marking: First, the lender marks a lien on the mutual funds you’re pledging. This process involves coordination between the lender and the mutual fund company.
Approval: After the lien is successfully marked, the lender approves the loan.
Disbursement: The approved loan amount is transferred to the bank account you provided during the application. You will receive a notification or email confirming the credit.
The disbursal can happen within a few hours, depending on the lender and the time taken for lien marking.
17. What are the interest rates for a LAMF?
Interest rates for a Loan Against Mutual Funds (LAMF) typically range between 9% to 12% per annum, but they can vary depending on several factors:
Type of mutual fund: Loans against debt mutual funds often have lower interest rates compared to loans against equity funds, which are more volatile.
Lender policies: Different banks and financial institutions may offer varying rates, with some offering competitive rates for high-value portfolios.
Loan tenure: Shorter-term loans may sometimes come with slightly lower rates, though this isn’t always the case.
Customer profile: While your mutual funds are the primary collateral, a good financial history or relationship with the lender might give you access to lower rates.
Always check the lender’s terms as rates can fluctuate, and some lenders may offer fixed rates, while others may offer floating rates that change based on market conditions.
18. How is the interest calculated on a LAMF?
The interest on a Loan Against Mutual Funds is generally calculated on a daily reducing balance basis. This means you are charged interest only on the outstanding loan amount, and as you repay the principal, the interest is recalculated based on the reduced balance.
For example, if you’ve taken a loan of ₹5 lakh and the interest rate is 10% per annum, the interest for one day would be calculated as:
So, for ₹5 lakh at 10% annual interest:
As you repay the loan, say monthly or quarterly, the interest amount will decrease because it’s calculated on the remaining principal. This method ensures that you’re not paying interest on the full loan amount if you’ve already repaid part of it.
19. Is the interest charged monthly or annually?
The interest on a Loan Against Mutual Funds is accrued daily but usually billed monthly. You’ll see the total interest accumulated over the course of the month in your statement, and you’re expected to pay it monthly. Some lenders may offer flexible repayment options, but the most common structure involves paying the interest on a monthly basis while you can repay the principal at the end of the loan tenure or in installments.
Here’s how it works:
Each day, the interest is calculated on the outstanding loan amount.
At the end of the month, all the daily interest amounts are summed up, and that’s the amount you owe as your interest payment.
You can choose to pay only the interest each month and repay the principal later, or make payments towards both interest and principal.
20. Are there any processing fees for a LAMF?
Yes, most lenders charge a processing fee for a Loan Against Mutual Funds, but it’s generally lower than what you’d pay for unsecured loans like personal loans. The processing fee usually ranges between 0.25% to 1% of the loan amount, with some lenders having a minimum flat fee.
For example:
If you take a loan of ₹10 lakh and the processing fee is 0.5%, the fee would be ₹5,000.
Some lenders may also have a minimum fee of, say, ₹1,000 to ₹2,000, even if you’re borrowing a smaller amount.
This fee is typically deducted upfront from the loan amount when it’s disbursed to your account, so if your loan is ₹10 lakh and there’s a ₹5,000 processing fee, you’ll receive ₹9.95 lakh.
21. What are the other charges applicable for a LAMF?
In addition to interest and processing fees, there are a few other charges that may apply to a Loan Against Mutual Funds:
Prepayment or Foreclosure Charges: Some lenders may charge a fee if you choose to pay off the loan before the tenure is completed. However, many lenders offer loans with zero prepayment charges, especially if you’re taking a LAMF. If applicable, this fee can range from 1% to 3% of the outstanding loan amount.
Lien Marking Fees: Some lenders may charge a small fee for marking a lien on your mutual fund units, though this is usually nominal.
Late Payment Penalty: If you miss a payment or delay your interest or principal repayment, there could be a late payment fee. This is usually a fixed amount or a percentage of the outstanding dues.
Stamp Duty Charges: In some cases, stamp duty charges may apply depending on the state laws or specific loan agreements.
Annual Maintenance Fee: If the loan tenure extends over a long period, some lenders may charge an annual feefor maintaining the loan account, although this isn’t very common.
Bounce Charges: If a payment is returned or bounces due to insufficient funds in your account, lenders may impose bounce charges to cover the processing inconvenience and cost.
Pledge Invocation Charges: If the lender needs to invoke the pledge due to non-payment or other contractual breaches, there may be fees associated with selling the pledged mutual fund units.
Lien Marking Charges: Apart from the initial lien marking fee, additional charges may apply if adjustments or updates are needed on the lien during the loan term.
Pledge Revocation Charges: When a loan is repaid in full, and the pledge on mutual funds is lifted, some lenders may charge a fee for the administrative process involved in revoking the pledge.
Penal Charges: These are charged for any breach of the loan terms, such as failing to maintain the required margin (ratio of loan amount to the value of mutual funds) or other covenant breaches.
It’s a good idea to check with your lender about all applicable fees before proceeding, so there are no surprises later. The charges are generally low compared to unsecured loans, which makes LAMF an attractive option for those looking to borrow against their investments.
22. Can I partially repay the loan?
Yes, most lenders allow partial repayment of a Loan Against Mutual Funds (LAMF). This means you don’t have to wait until the end of the loan tenure to start repaying. If you have some extra funds at any point, you can make a partial payment towards the principal, which reduces the outstanding loan amount. This is beneficial because the interest on your loan is calculated on the outstanding balance, so as you repay the principal, your future interest payments will also decrease.
For example, if you’ve taken a ₹5 lakh loan and after a few months you decide to repay ₹2 lakh, the remaining loan balance becomes ₹3 lakh, and you’ll only be charged interest on this reduced amount going forward.
23. Is there a prepayment penalty for early repayment?
This depends on the lender, but in many cases, there is no prepayment penalty for early repayment of a Loan Against Mutual Funds. Lenders understand that mutual fund values fluctuate, and borrowers might want to clear the loan when they have extra funds. If a prepayment penalty does apply, it’s usually small, often ranging from 1% to 3% of the outstanding loan amount.
Always check the terms and conditions with your lender. Some lenders, especially those offering loans at competitive rates, may waive prepayment charges, making it easy to repay the loan in full whenever you’re ready without any extra cost.
24. Can I increase my loan amount after the initial disbursement?
Yes, you can usually increase your loan amount after the initial disbursement if the value of your pledged mutual funds has increased, or if you have additional mutual fund units that you can pledge. This is often referred to as a top-up loan.
Here’s how it works:
If the market value of your mutual funds rises, the lender may be willing to offer you an additional loan based on the new valuation. The loan amount would be adjusted according to the Loan-to-Value (LTV) ratio.
Alternatively, if you purchase more mutual fund units or want to pledge additional mutual funds, you can apply for an increase in the loan amount.
It’s important to note that this top-up request will be subject to the lender’s policies, and you may need to go through a quick re-evaluation of your portfolio. The lender will calculate whether your existing or additional mutual funds can support a higher loan amount.
25. How is the loan tenure decided?
The loan tenure for a Loan Against Mutual Funds (LAMF) is typically 1 year because it functions as an overdraft (OD) account. This means that the loan is renewable annually, and you’ll need to renew the loan agreement with the lender every year to continue using the facility. The lender will reassess the value of your mutual funds and your financial situation at the time of renewal.
Throughout the year, you have flexibility in repaying and re-borrowing from the overdraft account, as long as you remain within the approved loan limit. At the end of the year, you can either repay the full amount and close the loan, or renew it based on the current value of your pledged mutual funds.
26. What happens if the value of my mutual fund falls?
If the value of your mutual fund falls, the lender might require you to provide additional security or partially repay the loan. This is because the loan amount is tied to the market value of the mutual funds you’ve pledged, and if the value drops significantly, it affects the loan-to-value (LTV) ratio.
Here’s what could happen:
Margin Call: If the mutual fund value falls below a certain threshold, the lender may issue a margin call. This means you’ll either need to:
Pay back a portion of the loan to restore the LTV ratio, or
Pledge additional mutual fund units to make up for the shortfall.
Sale of Mutual Funds: In extreme cases, if the fund value drops sharply and you’re unable to meet the margin call, the lender may sell some of your mutual fund units to recover their loan. However, this is typically a last resort, and most lenders will work with you to find a solution before taking such action.
27. What happens if the value of my mutual fund rises?
If the value of your mutual fund rises, it’s good news for you! A rise in your fund’s value improves the Loan-to-Value (LTV) ratio, and it may allow you to:
Increase your loan amount: Since the lender calculates your loan eligibility based on the current value of your mutual funds, you can request a top-up loan to borrow more money. The lender will re-evaluate the value of your portfolio and adjust the loan accordingly.
Relaxed margin calls: If your mutual funds are performing well and their value increases, it reduces the risk of a margin call. You’ll have a greater cushion, which means there’s less likelihood of being asked to repay or pledge additional assets.
In both scenarios, rising mutual fund values provide more flexibility and security for you as a borrower. You can either benefit from a higher loan or enjoy peace of mind knowing that your collateral is more valuable.
28. Can I switch or redeem mutual funds while the loan is active?
No, once you’ve pledged your mutual funds as collateral for the loan, you typically cannot switch or redeem those specific units while the loan is active. This is because the lender places a lien on your mutual fund units, which acts as a hold preventing any changes to or redemption of those units until the loan is repaid in full.
If you want to redeem or switch the pledged funds, you’ll first need to repay the loan or ask the lender if they can release part of the collateral. However, if you have other mutual funds that aren’t pledged, you can freely switch or redeem those units.
29. Will my mutual funds continue to earn returns during the loan period?
Yes, even though your mutual fund units are pledged as collateral, they will continue to earn dividends (if applicable) and capital appreciation during the loan period. The returns and growth of the funds are unaffected by the lien, meaning you still benefit from any increase in the value of the funds.
If your mutual fund pays dividends, some lenders might ask if you want the dividends to be paid directly to them as part of loan repayment or continue to be credited to your account. This can vary depending on the lender's terms, so it’s worth clarifying before you pledge the funds.
30. Can I use the loan for any purpose?
Yes, a Loan Against Mutual Funds (LAMF) offers flexibility in terms of how you can use the funds. It’s an unsecured loan, so there are no restrictions on how you use the borrowed amount. Whether you need money for personal expenses, medical emergencies, business investments, or any other purpose, you are free to utilize the loan as needed.
This is one of the advantages of a LAMF, as it gives you access to liquidity without having to sell your mutual fund investments, while offering complete freedom on how to allocate the loan amount.
31. What happens if I fail to repay the loan?
If you fail to repay the loan, the lender has the right to sell your pledged mutual fund units to recover the outstanding amount. Since the loan is secured by the mutual funds, the lender can liquidate your investment to cover the unpaid loan balance. Here’s how it typically works:
Warning and Margin Call: If you miss payments or fail to respond to a margin call (in case of a drop in mutual fund value), the lender will issue warnings and may ask for partial repayment or additional security.
Liquidation of Mutual Funds: If the situation isn’t resolved, the lender will redeem the pledged mutual funds and use the proceeds to settle the loan. If the funds’ value exceeds the loan amount, you’ll receive the excess back. However, if the value of your mutual funds has dropped, and the sale doesn’t cover the entire loan, you’ll be responsible for the remaining balance.
To avoid this, it’s essential to stay on top of your repayments and ensure you meet any margin calls if your mutual fund value decreases.
32. Is my mutual fund investment safe during the loan period?
Yes, your mutual fund investment is generally safe during the loan period, as the lender only places a lien on the units. The lien acts as a hold, meaning you still retain ownership of the mutual funds, and they will continue to generate returns. The lender cannot access or sell your mutual fund units unless you default on the loan.
However, the market value of the mutual funds may fluctuate during the loan period, and any market risk (increase or decrease in value) is borne by you, the investor. In the event of a significant drop in the value of your mutual funds, the lender may ask you to provide additional collateral or repay part of the loan.
33. Can I transfer my mutual funds to another lender for a loan?
Yes, in many cases, you can transfer your mutual funds to another lender to take a loan, but the process requires some coordination. This is usually done through a process known as loan takeover or balance transfer, where your new lender pays off your existing loan and takes over the lien on your mutual fund units.
Here’s how it works:
The new lender will assess the value of your mutual funds and your outstanding loan balance.
If they approve the loan, they will settle the existing loan with the first lender and place a new lien on your mutual funds.
Once the transfer is complete, you’ll start repaying the loan to the new lender, often with better terms or interest rates.
Keep in mind that there might be processing fees or penalties for prepayment with the original lender, so it’s a good idea to calculate whether switching lenders will save you money overall.
34. How do I repay the loan?
Repaying a Loan Against Mutual Funds (LAMF) is generally flexible, offering a few different options depending on the lender’s terms. Here’s how it works:
Interest Payments: Most lenders allow you to pay only the interest on the loan during the tenure. Interest is calculated on a daily reducing balance, so as you pay off the principal, your interest charges decrease.
Principal Repayment: You can choose to repay the principal in one go at the end of the tenure or in parts throughout the loan period. Many lenders allow partial repayments so you can reduce the outstanding loan balance over time without penalty.
Renewal or Full Repayment: Since LAMF usually functions like an overdraft with a tenure of 1 year, you can either:
Repay the loan in full at the end of the tenure to close the account, or
Renew the loan for another year by continuing to pay interest and keeping the principal as is, subject to your lender’s approval.
Repayments can be made through your linked bank account via online banking, NEFT/RTGS, or other payment methods as offered by your lender.
35. Are there any tax implications for taking a LAMF?
Taking a Loan Against Mutual Funds doesn’t have direct tax implications, but there are a few things to keep in mind:
Interest Payments: The interest you pay on a LAMF is not tax-deductible unless you’re using the loan for business purposes. If you’ve borrowed the money to invest in your business or for income-generating activities, you may be able to claim the interest as a business expense.
Capital Gains: If your lender sells your mutual fund units to recover unpaid dues, the sale will trigger capital gains tax based on the profit earned. For equity mutual funds, short-term capital gains (STCG) and long-term capital gains (LTCG) rules apply, depending on how long you held the units.
Dividends: If your mutual funds pay dividends during the loan tenure, they will still be credited to your account and may be taxable, depending on the applicable rules.
It’s always a good idea to consult with a tax advisor to understand the exact implications based on your personal circumstances.
36. How do I track my loan against mutual funds?
Tracking your Loan Against Mutual Funds is easy with most lenders providing several options:
Online Banking or Mobile App: Most lenders offer a digital platform where you can view details like:
The outstanding loan amount
The interest due and next payment date
A summary of pledged mutual fund units
The current market value of your mutual fund portfolio
Statements: You’ll receive regular statements, typically monthly, summarizing your loan details, including any interest charged and payments made.
Notifications: Many lenders also send SMS or email alerts for upcoming due dates, interest payments, or any significant changes in the value of your pledged mutual funds.
If you ever want to see the real-time status of your loan or mutual fund performance, you can easily access this information online or contact your lender for more details.
37. What are the advantages of taking a LAMF?
Taking a Loan Against Mutual Funds has several advantages:
No Need to Sell Investments: You can get liquidity without selling your mutual fund units, allowing you to keep your investment portfolio intact and continue earning returns or dividends.
Lower Interest Rates: Since LAMF is a secured loan, the interest rates are usually lower than unsecured loans like personal loans or credit cards. Rates typically range from 9% to 12%, depending on the lender and type of mutual funds pledged.
Flexible Repayment: You can choose to repay the loan as per your convenience, with the option to pay only the interest throughout the tenure and repay the principal at the end.
Quick Access to Funds: LAMF is relatively easy and fast to process, especially if you already have a demat account. In many cases, the loan can be disbursed in 1-2 days.
No Restriction on Usage: You can use the loan for any purpose, whether it’s for personal expenses, investments, or business needs.
38. What are the disadvantages of taking a LAMF?
While a Loan Against Mutual Funds offers flexibility, there are some disadvantages to consider:
Market Risk: The loan amount is tied to the market value of your mutual funds. If the value of your pledged funds drops significantly, you may face a margin call from the lender, requiring you to either pledge more funds or repay part of the loan.
Limited Loan Amount: The Loan-to-Value (LTV) ratio usually ranges between 50% and 80% of the mutual fund’s value. This means you won’t be able to borrow the full value of your mutual fund investment.
Lien on Mutual Funds: You can’t redeem or switch the pledged mutual funds while the loan is active, which limits your flexibility in managing those investments.
Charges and Fees: There are processing fees, lien marking charges, and possibly prepayment penalties (depending on the lender), which can add to the overall cost of the loan.
39. How is LAMF different from a personal loan?
Here are some key differences between a Loan Against Mutual Funds (LAMF) and a personal loan:
Collateral: LAMF is a secured loan backed by your mutual fund investments, whereas a personal loan is unsecured and doesn’t require any collateral.
Interest Rates: LAMF generally offers lower interest rates compared to personal loans because the risk to the lender is lower due to the collateral. Personal loan interest rates can range from 12% to 18% or higher, depending on your credit score.
Loan Amount: The loan amount in a LAMF is limited by the value of your mutual funds and the LTV ratio(usually 50% to 80% of the fund’s value). Personal loans, on the other hand, are based on your income and creditworthiness and can offer higher amounts, but at a higher interest rate.
Repayment Flexibility: With a LAMF, you can opt to pay only the interest for the tenure and repay the principal later, while personal loans usually come with fixed monthly EMIs (equated monthly installments) for both principal and interest.
Processing Time: LAMF is typically quicker to process, especially if you already have a demat account and mutual funds in place. Personal loans, while fast, may require more scrutiny, especially if the loan amount is high.
Purpose: LAMF can be used for any purpose, just like a personal loan. However, the key difference is that LAMF lets you borrow against your investments without having to liquidate them, whereas with a personal loan, you need to rely on your income or credit profile to qualify.
40. Can NRIs apply for a LAMF?
Yes, Non-Resident Indians (NRIs) can apply for a Loan Against Mutual Funds (LAMF), but the availability of this option depends on the lender’s policy and mutual fund house. Some lenders in India offer this facility to NRIs, while others may not. If an NRI holds mutual funds in India through a Non-Resident External (NRE) or Non-Resident Ordinary (NRO) account, they may be eligible for a LAMF.
However, a few things to keep in mind:
The NRI’s mutual fund units should be in dematerialized (demat) form.
The loan might only be available against specific types of funds, such as domestic equity or debt funds.
NRIs might be required to fulfill additional compliance requirements or submit specific documents, such as proof of their overseas residency and KYC (Know Your Customer) documents.
It’s a good idea to check with the lender and the mutual fund company to understand if they offer this service to NRIs and the specific conditions involved.
41. What happens if the mutual fund company declares dividends during the loan period?
If your mutual fund declares dividends during the loan period, these dividends will still be credited to your account, even though the units are pledged as collateral. The lender doesn’t have a claim on the dividends; their lien is only on the units themselves, not the income generated by them.
However, some lenders may give you the option to use the dividends towards loan repayment if you wish. This can be a convenient way to reduce your outstanding loan amount without using your own funds. If you prefer to keep the dividends for yourself, you’ll continue receiving them as usual.
42. How is the margin call handled in case of a drop in mutual fund value?
A margin call happens when the value of your pledged mutual funds drops below a certain threshold, making your loan-to-value (LTV) ratio higher than the lender’s allowed limit. Here’s how it’s usually handled:
Notification: The lender will first notify you that the value of your mutual fund has dropped, and the LTV ratio needs to be restored.
Options to Restore LTV:
Repay a portion of the loan: You can repay part of the loan to bring the LTV ratio back within the allowed limit.
Pledge additional assets: If you have more mutual funds or other assets, you can pledge those to cover the shortfall and maintain the loan.
Failure to Restore: If you’re unable to take any action, the lender may sell some of the pledged mutual funds to bring the LTV ratio back to an acceptable level. This is typically the last resort and happens only if you don’t respond to the margin call.
Lenders usually give you some time (a few days to a week) to take action before selling your mutual funds.
43. Can I top-up my loan if my mutual fund value increases?
Yes, if the value of your mutual fund increases during the loan period, you can request a top-up loan. A top-up allows you to borrow additional funds without closing your existing loan. Here's how it works:
The lender re-evaluates the current market value of your pledged mutual funds.
If the value has increased, your loan-to-value (LTV) ratio will have improved, making you eligible for more funds.
You can apply for the top-up, and the lender may approve an additional loan amount based on the new LTV calculation.
For example, if your mutual fund portfolio originally had a value of ₹10 lakh and you took a loan of ₹5 lakh, but now the portfolio has grown to ₹12 lakh, the lender may allow you to top up your loan by an additional amount based on the new value.
44. What is the procedure for lien marking in a LAMF?
Lien marking is the process where the lender places a hold or lien on your mutual fund units as collateral for the loan. Here's the step-by-step procedure:
Loan Application: When you apply for a Loan Against Mutual Funds, you provide the details of the mutual funds you wish to pledge.
Mutual Fund House Notification: Once the loan is approved, the lender notifies the mutual fund company or the depository (such as NSDL or CDSL) where your mutual funds are held in demat form. This is done to initiate the lien marking process.
Lien Confirmation: The mutual fund house or the depository marks a lien on the specified mutual fund units. This lien acts as a hold, meaning you cannot redeem, switch, or sell the units until the loan is repaid in full.
Loan Disbursement: After the lien is successfully marked, the lender disburses the loan amount to your account. You’ll receive a confirmation from both the lender and the depository that the lien has been marked.
45. How soon can I get my mutual funds released after loan repayment?
Once you’ve repaid your loan in full, the lender will initiate the process to release the lien on your mutual funds. Here's what happens:
Loan Closure: After the lender confirms that the full loan amount (principal + any outstanding interest) has been repaid, they will notify the mutual fund house or the depository to remove the lien.
Lien Release: The mutual fund house or depository removes the lien on the pledged units, and you regain full control over your mutual fund investments. You’ll be free to redeem, switch, or sell the units as you wish.
Timeline: The lien release process usually takes 1-2 business days after the loan repayment. In most cases, it’s a quick and seamless process, and you’ll receive confirmation from both the lender and the depository when the units are released.
In summary, you can expect to have full access to your mutual funds within a few days after completing your loan repayment.
46. Can I take a loan against a mutual fund in my minor child's name?
No, you cannot take a Loan Against Mutual Funds (LAMF) if the mutual funds are held in your minor child’s name. This is because a minor is not legally allowed to enter into loan agreements or financial contracts. While a guardian may manage a minor’s investments, such as mutual funds, taking a loan involves legal liability that a minor cannot assume.
However, once the child becomes an adult (18 years old), they can apply for a LAMF in their own name using their mutual fund investments.
47. How can I cancel or close my loan account before tenure completion?
You can cancel or close your Loan Against Mutual Funds account before the tenure is completed by repaying the outstanding loan balance in full. Here's what you need to do:
Check Outstanding Balance: Contact your lender or log into your online account to check the total amount you owe, including any outstanding interest.
Full Repayment: Make a full repayment of the loan amount through the payment methods provided by your lender (such as bank transfer, NEFT, or cheque).
Lien Release: After the loan is fully repaid, the lender will initiate the lien release process, which means the lien on your mutual funds will be removed, and you will regain full control over them.
Closure Confirmation: Once the lien is removed, you should receive confirmation from the lender that your loan account has been closed. Ensure you get written or digital confirmation that the loan has been settled.
Some lenders may offer zero prepayment penalties, but others may charge a fee for closing the loan early, so check the terms before deciding to close the loan account.
48. What should I do if I face issues during my loan application or repayment?
If you encounter problems during your Loan Against Mutual Funds application or repayment, here’s how you can handle it:
Contact Customer Support: Most lenders have a customer service helpline or online chat support. Get in touch with them immediately if you’re facing issues like document submission delays, lien marking problems, or incorrect loan amounts.
Escalate the Issue: If your issue isn’t resolved at the first level of customer support, escalate it by asking to speak with a manager or submitting a formal complaint through the lender’s website or app.
Check Loan Statements: If you notice any discrepancies in your repayment or interest charges, always check your monthly loan statements and cross-verify them with your payment history.
File a Grievance: If your issue is not resolved by the lender, you can file a grievance with the banking ombudsman or a relevant financial regulator. Each lender has a defined grievance redressal process, and this can help ensure that your case gets the necessary attention.
Legal Assistance: For major issues such as disputes over repayment terms or unauthorized mutual fund redemption, you may need to seek legal advice to protect your interests.
The key is to act quickly and stay proactive in addressing any issues, so they don’t snowball into larger problems down the line.
49. What terms and documents must be agreed upon for availing a LAS?
To avail a Loan Against Securities (LAS), both the borrower and lender must agree on several key terms and provide specific documents. Here’s what typically happens:
Loan Agreement: This includes the loan amount, interest rate, loan tenure (usually 1 year, renewable), and the repayment schedule. It also covers any penalties, such as late payment fees or charges for early loan closure.
Collateral Agreement: The securities you’re pledging (stocks, mutual funds, bonds, etc.) are listed, and the agreed Loan-to-Value (LTV) ratio is set. This ratio determines how much loan you can get based on the market value of your securities.
KYC (Know Your Customer) Documents: You’ll need to provide standard identification and address proofs. These can include:
PAN Card and Aadhaar Card for identity verification.
Proof of address such as a utility bill or bank statement.
Demat Account Details: Since the securities must be held in a dematerialized (demat) form, you’ll need to provide your demat account details to facilitate the lien marking process.
Lien Agreement: This is an authorization allowing the lender to place a lien on your pledged securities. This means the securities are frozen and cannot be sold or redeemed by you during the loan tenure. The lien will be released once the loan is fully repaid.
Before signing the agreement, it’s important to review all the terms, including any hidden fees or charges, and clarify your repayment flexibility.
50. Will I get a grace period to repay the loan?
Whether or not you get a grace period depends on the lender’s policies. Some lenders do offer a grace period, especially in cases where your pledged securities’ value drops, leading to a breach of the Loan-to-Value (LTV) ratio.
Here’s how it works:
If the LTV exceeds the allowed limit due to a fall in the value of your securities, the lender may give you a short grace period (often a few days to a week) to take corrective action. This could involve repaying part of the loan or pledging additional securities to bring the LTV back within acceptable limits.
In terms of interest repayment, most lenders have a fixed due date each month, but some may offer a short grace period to make your payment before applying late fees.
If you’re unable to make the necessary adjustments within the grace period, the lender can liquidate your pledged securities to cover the shortfall.
51. What is a Sanction Limit?
A Sanction Limit is the maximum loan amount that a lender approves for you based on the market value of the securities you’ve pledged and the lender’s Loan-to-Value (LTV) ratio.
Here’s how it works:
The lender assesses the total value of your securities and applies the LTV ratio, which could range from 50% to 80%, depending on the type of securities (equity, debt, or mutual funds).
Based on this evaluation, the lender sanctions a specific limit, which represents the highest loan amount you can borrow. For example, if your mutual funds are worth ₹10 lakh and the lender offers an LTV of 60%, your sanction limit would be ₹6 lakh.
The sanction limit also depends on your creditworthiness and the lender’s internal policies. Keep in mind, the actual amount you borrow may be lower than the sanction limit, depending on your immediate need.
52. What happens if the LTV is not brought down?
If the Loan-to-Value (LTV) ratio exceeds the agreed limit (usually due to a drop in the market value of your pledged securities), the lender will typically issue a margin call, requiring you to take corrective action.
If you don’t bring the LTV down, here’s what can happen:
Margin Call: Initially, the lender will notify you and give you time (typically a few days to a week) to correct the imbalance. You can either:
Repay a portion of the loan to restore the LTV ratio, or
Pledge additional securities to increase the total value of your collateral.
Sale of Securities: If you fail to respond to the margin call or are unable to take action within the specified time, the lender can sell some or all of your pledged securities to bring the LTV ratio back to an acceptable level. This is done to recover part of the loan amount and minimize the lender’s risk.
It’s important to act quickly when the lender issues a margin call to avoid the forced sale of your assets.
53. What does confiscation of pledged shares or mutual funds mean?
Confiscation of pledged shares or mutual funds means that the lender liquidates your pledged securities to recover the loan amount if you default on repayments or fail to meet a margin call.
Here’s what happens in more detail:
Lien on Securities: When you take a Loan Against Securities, the lender places a lien on the pledged assets, giving them the right to sell the securities if you fail to repay the loan.
Default or Failure to Correct LTV: If you miss multiple repayments or don’t address a margin call (when the LTV exceeds the allowed limit), the lender will start selling your pledged securities.
Recovery: The lender uses the proceeds from the sale of the securities to repay the loan, including any interest or penalties you owe. If the sale proceeds exceed the outstanding loan amount, the lender will return the excess to you. Conversely, if the proceeds are insufficient to cover the loan, you’ll still owe the remaining balance.
This is why it’s important to stay on top of repayments and monitor the value of your pledged securities.
54. How to maintain the LTV below 50%?
To maintain the Loan-to-Value (LTV) ratio below 50%, you need to ensure that the value of your pledged securities is sufficient relative to the loan amount. Here are a few ways to do this:
Monitor Market Value: Keep an eye on the market value of your pledged securities (such as stocks or mutual funds). If you notice a significant drop in their value, you might need to take action to avoid exceeding the LTV threshold.
Make Partial Repayments: If the value of your securities decreases, consider making partial loan repayments to bring the LTV ratio down and avoid a margin call. For example, if your LTV is creeping up toward 60%, repaying a part of the loan will reduce the ratio and keep it under control.
Pledge Additional Securities: If you can’t repay the loan immediately, you can pledge more securities to increase the total collateral value. This helps maintain a lower LTV by ensuring your loan is adequately covered by the collateral.
Keeping the LTV below 50% is crucial to avoid margin calls and protect your securities from being sold by the lender.
