Loan Against Mutual Funds Interest Rate
In today’s fast-paced financial world, people often need quick access to cash for various reasons—emergencies, investments, business needs, or personal requirements. While traditional loans remain popular, a new trend gaining momentum is taking a loan against mutual funds. This option allows investors to leverage their existing investments without liquidating them. A major factor to consider in such loans is the interest rate. In this guide, we’ll explore what loan against mutual funds interest rate means, how it works, what influences it, and why it’s a smart option for many borrowers.
What is a Loan Against Mutual Funds?
A loan against mutual funds (LAMF) is a type of secured loan where you pledge your mutual fund units as collateral to a bank or non-banking financial company (NBFC) in return for a loan. It’s a convenient way to meet financial needs without redeeming your investments prematurely.
You still remain the owner of your mutual fund units and continue to earn returns on them (unless explicitly stated otherwise by the lender). However, the lender holds the lien on your units until you repay the loan.
Key Features of Loan Against Mutual Funds
- Loan Type: Secured loan
- Collateral: Equity mutual funds, debt mutual funds, or hybrid mutual funds
- Loan Amount: Usually 50-70% of the fund’s Net Asset Value (NAV)
- Processing Time: Quick disbursal, often within 24-48 hours
- Tenure: Flexible, usually from a few months up to 3 years
- Repayment Options: EMI, bullet payment, or overdraft facility
- Ownership: You continue to own the units and earn returns
What is the Interest Rate on Loan Against Mutual Funds?
The interest rate on loan against mutual funds typically ranges between 7% to 12% per annum, depending on several factors such as the lender, type of mutual fund pledged, loan tenure, and borrower’s credit profile.
Let’s break it down further:
| Type of Mutual Fund | Loan-to-Value (LTV) Ratio | Typical Interest Rate |
|---|---|---|
| Equity Mutual Funds | Up to 50% | 9% – 12% p.a. |
| Debt Mutual Funds | Up to 70% | 7% – 10% p.a. |
| Hybrid Mutual Funds | 50% – 65% | 8% – 11% p.a. |
These interest rates are lower than personal loan rates, which usually start at 10% and go as high as 24%, making LAMF a more affordable credit option.
Factors That Influence Loan Against Mutual Funds Interest Rate
- Type of Mutual Fund
- Debt funds usually attract lower interest rates due to lower risk.
- Equity funds, being volatile, may have higher rates and lower LTV.
- Loan Amount and Tenure
- Higher amounts or longer tenures might attract slightly higher rates.
- Short-term overdraft facilities may have variable rates.
- Lender’s Policies
- Banks and NBFCs have different internal interest rate structures.
- Public sector banks may offer lower rates compared to private ones.
- Credit Score
- A good credit score can fetch you better interest rates.
- Relationship with the Bank
- If you have a strong existing relationship with the lender (e.g., salary account, previous loans), you might be offered lower rates.
Advantages of Loan Against Mutual Funds
- ✅ Lower Interest Rates compared to unsecured loans
- ✅ No Need to Sell Your Investments
- ✅ Quick Processing and Approval
- ✅ Flexible Repayment Options
- ✅ No Impact on Your Mutual Fund Returns (in most cases)
- ✅ Available Online through banks and fintech platforms
Disadvantages to Consider
- ❌ Limited Loan Amount – Usually 50-70% of your mutual fund value
- ❌ Lender Holds Lien – You can’t redeem units without repaying the loan
- ❌ Market Risk Remains – NAV drops can affect the loan value
- ❌ Penalty on Non-Repayment – Could lead to forced sale of units
How to Apply for a Loan Against Mutual Funds
Step-by-Step Process:
- Choose a Lender: Compare interest rates and terms offered by banks and NBFCs.
- Check Eligible Funds: Not all mutual funds are accepted as collateral.
- Online Application: Fill in details on the bank/fintech platform.
- Lien Marking: The lender will place a lien on pledged units.
- Loan Disbursement: Funds are transferred to your bank account.
Some popular lenders offering loans against mutual funds in India include:
- HDFC Bank
- ICICI Bank
- Axis Bank
- Bajaj Finserv
- SBI
- Groww and Zerodha (via partnered NBFCs)
Interest Rate Comparison: LAMF vs. Other Loans
| Loan Type | Average Interest Rate | Security Required |
|---|---|---|
| Loan Against Mutual Funds | 7% – 12% | Yes |
| Personal Loan | 10% – 24% | No |
| Loan Against FD | 6% – 8% | Yes |
| Credit Card Cash | 24% – 36% | No |
As seen, loan against mutual funds offers one of the most affordable rates, second only to loan against fixed deposits.
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Final Thoughts
A loan against mutual funds is a smart financial tool that allows investors to unlock liquidity without disturbing their investments. With competitive interest rates ranging between 7% to 12%, it serves as an ideal alternative to high-interest personal loans or credit cards.
However, before opting for this type of loan, always compare interest rates, understand the terms of repayment, and assess your financial capacity. If used wisely, a LAMF can be an efficient way to manage short-term financial needs while your wealth continues to grow.
FAQs
Q1: What is the minimum interest rate on a loan against mutual funds?
A: The minimum interest rate can start from around 7% per annum for debt mutual funds.
Q2: Can I continue to earn returns on my mutual funds during the loan?
A: Yes, you usually continue to earn returns unless the lender has specific restrictions.
Q3: Can I repay the loan early without charges?
A: Many lenders allow prepayment with little or no penalty. Always confirm before applying.
Q4: Is it better than a personal loan?
A: Yes, due to lower interest rates and faster processing, it is often a better option if you have mutual fund investments.
