Understanding Loan Against Mutual Funds: Benefits, Process, and Eligibility

Spread the love

In the fast-running world, life is full of unexpected situations for which we are unprepared. All such situations, from medical emergencies to home renovation, require financial support. Then the person takes the support of options like loans. But traditional loans come with a high interest rate which may not be practical for everyone. This is where a better option comes in to save you from all the problems, a Loan Against Mutual Funds. It allows you to access the financial funds without liquidating your mutual funds and disturbing the long-term growth plans of your investment. At PayMe, we developed this new product to solve all your problems- Loan Against Mutual Funds (LAMF).

Table of Contents

Benefits Of Loan Against Mutual Funds

Below are some of the key benefits of LAMF that will help you make the right choice in your times of need:

Loan without selling Mutual Funds

Loan without selling Mutual Funds

One of the major benefits of LAMF is that it provides you with access to funds without any need to sell your Mutual Fund Investments. This allows you to satisfy your financial needs while keeping the long-term growth plans of your investments intact. This means there is no need to disturb the growth of your well-planned investments, they can continue to give you profit while you take a loan against them.

Minimum Paperwork

A loan against Mutual Funds does not require much paperwork as in this loan, Mutual Funds act as the collateral. This reduces the hassle that the borrower usually has to face during the process of traditional loans. The verification process is also done online which makes the process smoother and faster which is beneficial for the borrower who is in need of funds in the tight situation of their life.

Credit Score

As Loan Against Mutual Funds is completely based on the Mutual Funds as the collateral, there is no impact of the credit score on the approval of the loan. Loan approval mostly depends on the value of the pledged Mutual Fund Unit and not the credit score of the borrower. This makes it an accessible and practical option for those with limited credit history. The borrowers can have access to funds in times of need without the care of their creditworthiness.

Flexible Financing

Processing the Loans Against Mutual Funds takes less time as compared to traditional loans because of less paperwork. This provides flexibility for the investor to have access to funds without any delays at the time when they are needed the most.

Low Interest Rates

When compared to traditional Personal Loans or Credit Card debts, the LAMF comes with a low interest rate. This attracts the borrowers as it comes as an affordable option to them and reduces the overall cost of borrowing. This makes Loan Against Mutual Funds a feasible option during times of need, rather than liquidating the well-planned Mutual Funds.

Continue Investment Benefits

In LAMF, you take the loan against mutual funds instead of selling it. This allows you to continue enjoying the dividends and capital appreciation and ensures that you don’t miss out on any benefits of staying invested and protecting the long-term growth of your well-planned investments. This turns out to be a profitable set-up as you satisfy both your financial and investment goals.

How Do Loans Against Mutual Funds Work?

Loan Against Mutual Funds provides the opportunity to borrow funds by using the Mutual Funds holding as the collateral. This gives the borrower quick and smooth access to cash without any need to sell the investments for the purpose of completing their financial needs.

Here is the step-by-step breakdown of how Loan Against Mutual Funds (LAMF) works-

Choose the Lender- The Borrower starts the process by choosing a bank or NBFC that provides Loan Against Mutual Funds.
Select Eligible Mutual Funds- Lenders may have a specific requirement of which type and value of funds qualify as collateral. All types of funds units are not eligible to be considered as collateral.
Applying and Pledging- The borrower then applies for the loan and gives the lender the authority to place a lien (hold) on their mutual fund units. The borrower retains the ownership of the Mutual Funds unit used as the collateral, but this lien gives the lender some temporary rights over them. The borrower cannot sell these Mutual Funds till the time the loan amount is repaid.
Determine the Loan Amount- After the borrower pledges the Mutual Funds unit, the lender evaluates the current market value. Then the lender determines the loan amount. The amount is usually 50-80% of the market value of the pledged Mutual Funds unit according to the Mutual Funds type and the policies of the lender.
Loan Disbursement- Once the amount is decided, and the loan is approved by the lender, the amount gets disbursed directly to the borrower’s account. Thus, providing borrowers with quick access to the funds.
Flexible Repayment- The lender provides the borrowers with an option like EMI or a lump sum for the repayment of the loan. The borrower can choose the option of repayment of the borrowed amount according to their comfort.
Lien Removal- When the borrower pays the full amount of the loan along with the interest, the lien is removed. After that, the borrower gains back all the rights over the Mutual Funds units used as the collateral.

Through this whole process, the investors get funds in their hands in times of need without selling the Mutual Funds. As a result, they are able to protect long-term goals alongside addressing the short-term needs in their day-to-day lives.

Why Taking LAMF Can Be Better than Exiting Investments?

Loan Against Mutual funds gives you remarkable benefits over giving away your investments. By choosing LAMF, the borrower can avoid the risk of selling the investments during the time of unfortunate market dip to meet the financial needs in the emergency as the investments remain intact and have the time to grow in the future. This option also lets you avoid potential capital gain taxes which will reduce the amount of funds when they are sold. As LAMF offers lower interest rates than personal loans, it’s the better option to meet financial needs.

Another major benefit of LAMF is that the approval and the amount of the funds depend upon the value of the pledged Mutual Funds unit rather than the creditworthiness of the person. This allows access to the funds even to those who have low credit scores. Thus, it makes it an accessible and quick option for the borrowers. All these benefits provide flexibility for the borrower to meet their urgent needs without disturbing their long-term financial goals. Overall, LAMF provides an efficient way to get access to the funds without compromising on the potential gains and also helps to avoid triggering taxes.

What Can LAMF Be Used For?

LAMF can prove to be a game changer as it offers the borrower a chance to meet financial needs without compromising long-term financial goals. Here are the situations for which LAMF can be used for:

Debt Consolidation-

A LAMF is an effective way to consolidate all the high-interest loans, like credit card dues and personal loans. This approach can simplify debt management for you by combining multiple loans into one manageable payment. By using Mutual Funds as the collateral for the loan, you get a lower interest rate on the loan which reduces the overall cost of the borrowing.

Financial Emergency Needs-

A Loan Against Mutual Funds serves as a protective safety net during times of emergencies by providing access to funds quickly by providing funds without selling investments. It can be for medical expenses, house repair or any other emergency financial need, LAFM allows the borrower to pledge their Mutual Funds unit as collateral and get the loan at lower interest rates than most other loan options.

Funding Short Term Goals-

A LAMF is most suited for funding short-term financial goals, especially where time is a restriction. It can be for a business opportunity, education expenses, or for the down payment on a property. LAMF offers quick access to funds without liquidating long-term investments. Since the loan is against the Mutual Funds unit, it comes with a lower interest rate as compared to other options. Also, the flexibility in the repayment term allows the borrower to meet the short-term financial requirement without disturbing the long-term investment growth.

Downpayment on Big-Ticket Purchases-

A LAMF is an ideal option to finance big-ticket purchases like a house or a car without taking high-interest loans or liquidating investments. By using the mutual funds unit as the collateral, borrower can get loans at a lower interest rate than the personal loan meeting their financial needs while preserving the investments. This approach allows the borrower to keep the investment portfolio intact and allow it to grow to its full potential.

Eligibility for Loan Against Mutual Funds

Here is the list of all eligibility requirements that one must meet to secure a Loan Against Mutual Funds-

Age: You need to be between 18 to 70 years of age and have an active PAN Card linked to your bank account.
Citizenship: You must be an Indian Citizen.
Bank Account: Your PAN account and Mutual Fund account must have the same PAN number, mobile number and E-mail ID.
Employment: You can be either self-employed or salaried.
Credit score: Some of the lenders may have a minimum CIBIL score requirement. But most of the lenders take a relaxed approach while evaluating the applications of Loan Against Mutual Funds.
Mutual Funds type: The pledged mutual funds should be from Validated and Authorised Asset Management Companies (AMC). Most lenders provide LAMF against CAMS, Kfintech and DEMAT-registered mutual funds.
Mutual Funds Amount: Your Mutual Funds unit amount that you want to use as collateral should range from a minimum ₹15,000 to a maximum ₹1 crore.

Documents Required:

Documents required for a Loan Against Mutual Funds may be different for different lenders. But generally, these documents are-

Identity Proof- Proof of identity can be an Aadhaar Card / Passport / Driver’s License / Voter ID.
Address Proof- Proof of Address can be an Aadhaar Card / Passport / Driver’s License / Voter ID.
Signature Proof- Proof of signature can be PAN Card / Banker’s Signature Verification / Passport.
Pledge Form- For undertaking the pledge.
Mutual Funds Statement- Current self-attested statements of holdings.

How to Apply for a Loan Against Mutual Funds at PayMe?

Applying for LAMF at the PayMe app is a very effortless process through which you can access funds without selling your investments. Here are the steps to avail of LAMF through the PayMe app:

Install the PayMe India App on your Android or iOS device.
Log in or create an account using your Mobile number and PAN number.
If you are a new user complete the E- KYC process by uploading your Aadhar Card, PAN Card and live selfie.
After completing the registration process, now you will see the Super App Dashboard.
Under the “Other Product Section”, click on “Mutual Fund Loan”.
You will be asked to enter your mobile number and PAN number to check the Mutual Funds that are registered with your name.
Complete the process and enter the amount that you want for the loan.

By following these basic steps, you can easily apply for LAMF through the PayMe app. The loan amount will directly be disbursed to your bank account. With minimum paperwork, you will get LAMF through PayMe ensuring that you have the funds when you need them without disturbing your growing investments.

Conclusion

A Loan Against a Mutual Fund is a valuable tool that gives you access to funds without disturbing the long-term investment goals. It offers you funds at a lower interest rate than a personal loan, tax saving and the major benefit of continuous investment growth. These funds from LAMF can be used for emergencies, consolidating high-interest debts or funding big-ticket purchases. LAMF provides you with the flexibility of repayment options that align with an individual’s financial needs. PayMe app makes the process even easier, with a simple application process which allows you to pledge your Mutual Fund Unit as collateral and access the funds without any hassle. With PayMe, you can have access to funds easily without disturbing your investment and keeping your financial goals in check.

FAQs

Is it safe to take a loan against mutual funds?

Yes, a Loan Against Mutual Funds is a completely safe tool as it is a secured loan where your Mutual Funds Unit acts as the collateral, reducing risk for both the lender and the borrower. Just be sure that you follow the repayment terms so that you do not lose the pledged Mutual Funds Unit.

Which bank provides digital loans against Mutual Funds?

There are several banks and financial institutes that offer LAMF. Some of these major banks are HDFC Bank, ICICI Bank, Axis Bank, Kotak Mahindra Bank, SBI, and IDFC First Bank. These banks provide loans by keeping hold of your Mutual Funds Unit and provide you with funds at a lower interest rate than personal loans.

Can I withdraw a loan against mutual funds with lock-in periods?

Yes, you can withdraw LAMF with lock-in periods. The lock-in period, as in the case of Tax Saving Funds, is 3 years, which restricts the transfer or sale of the funds until the lock-in period is over. Thus, the lender will not accept the funds during the lock-in periods. But after the lock-in period is over, you can apply for LAMF using that Mutual Funds Unit as collateral.

What is the difference between loans against FDs and mutual funds?

Loan against FDs uses FDs as collateral which have limited growth potential and offer lower interest rates and guaranteed returns. In contrast, LAMF used Mutual Funds units as collateral which allows higher growth potential with high interest rates. LAMF offers flexibility, as mutual funds continue to grow but also carries market risk.

How does a loan against securities and a loan against mutual funds work on PayMe?

The product by PayMe, Loan Against Mutual Funds (LAMF) allows you to access funds by using your Mutual Funds investment as collateral. Without liquidating the Mutual Funds, you can get instant loans based on the current value of your holdings. The loan works like an overdraft facility, where you can withdraw and reuse the funds as needed, up to the approved limit. This product is designed for you to seek quick cash flow while maintaining your investment growth.

Also, Read:

This post is also available in: हिन्दी (Hindi)