Loan Against Mutual Funds: Should You Avail It?

Banks offer loan against mutual funds, whose features are the same like loan against equity shares. These days of course, there is also the digital loan against mutual funds, which is fast and less time consuming.

How loan against mutual funds work?

If you go for digital loans against mutual funds, you can pledge your mutual funds with any bank online and you can get an overdraft instantly. The advantage is that there is no need to liquidate your mutual fund schemes. However, if you do not pay-off the loan, than the bank has the right to deal appropriately with your pledged mutual fund units to recover their amounts.

Most banks have a maximum and minimum amount for the loan. For example, State Bank of India has prescribed a maximum limit of Rs 20 lakhs loan against equity mutual fund units. On the other hand the minimum loan amount is Rs 20,000.

Margin for loan against mutual funds

It's important to note that there is a 50 per cent margin that is required for pledging your mutual fund units and taking a loan. So, if you wish to avail a loan of Rs 10 lakhs, you need to pledge mutual fund units worth Rs 20 lakhs at the very least.

Most banks are unlikely to reduce or lower the limits.

What are the interest rates and loan processing fees for loan against mutual funds?

The interest rates on loan against mutual funds would vary from bank to bank. State Bank of India's effective interest rate for the loan translates to 9.75 per cent per annum. This is much better than the interest rates on personal loans, which could be as high as 16 per cent. SBI charges an interest rate of 11.90 per cent on loan against the National Savings Certificate and Kissan Vikas Patra.

Should you avail of loan against mutual funds?

Interest rates on any pledged instrument or property is much lower, since the bank has a collateral. However, one must be capable of paying back the loan amount as the bank can sell and encash the pledged instrument.

Apart from interest rates, there is also a processing fee that is charged by most of banks. The processing fees works to around 0.75 per cent in the case of State Bank of India.

If you are capable of paying back the loan amount, the loan against mutual funds is the best bet. Interest rates are much lower these days, which is another added advantage. Check and compare interest rates against mutual fund loans before investing.