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How to Calculate Your Loan Amount Against Your Mutual Fund

loan against mutual funds

Mutual funds are excellent investment options for people from varied age groups. Depending on the type of mutual fund, you can either look at creating wealth or safeguarding your capital.

In addition to fulfilling your financial goals, you can get a loan against your mutual fund investments as well.

One of the fantastic features of getting a loan against MFs is you still own your assets while enjoying the loan facility.

The process is simple, hassle-free and digitised. Today we’ll talk about calculating the loan amount you can avail against MF units.

But first, let’s talk about loan against MF means and who is eligible for the facility.

What is Loan against Mutual Funds in India?

Just like we take loans from banks, loans against MFs are a type of secured loan available to mutual fund unitholders. Here, your mutual fund units work like collateral; thus, interest rates are much lower than those of collateral-free loans.

Since banks or financial institutions keep your securities as collateral, there is a risk of losing your investments in case of failure of repayment.

One of the main features of this facility is that your assets continue to earn returns/profits for you while you’ve taken a loan against them. This means you enjoy the loan facility while your investments continue to grow simultaneously. You don’t lose the ownership of assets.

To avail of such a loan, you may go to a bank or any financial institution and apply for a loan. These days, the entire process is performed digitally. You can apply for a Loan Against Mutual Funds online through FinEzzy as well.

The amount you’d get against your securities depends upon the bank’s terms and the types of securities you hold.


Eligibility of loan

  • All individual investors, Hindu Undivided Families, Trusts, Non-Resident Indians, and entities are eligible for availing loans against mutual fund units, potentially benefiting from the loan against mutual funds interest rate offered by lenders.
  • Minors are not eligible for loans against mutual funds.


The Loan-to-Value Ratio of Loan Against Mutual Funds (LTV)

Before talking about the minimum and the maximum loan amount, we need to know about Loan To Value ratio.

The Loan to Value (LTV) ratio is the loan amount the financial institution has agreed to lend against the value of your mutual fund units that you have kept as collateral. So, when you apply for a loan against mutual funds, you might not get all the money that you are expecting. LTV is the percentage of the loan you receive against your MF investments.

Loan-to-value ratio = (Loan amount that you receive from the bank/ Market value of your MF investments kept as collateral) * 100

For example, if you get a loan amount of Rs. 50,000 against your equity mutual fund units worth Rs 1 lakhs, then the loan-to-value ratio will be (1,00,000 / 50,000) x 100 = 50%.

In this case, your loan-to-value ratio is 50%.


Minimum Loan Amount

The minimum loan amount will depend on the lender. For instance, the minimum loan amount for SBI’s loan against mutual funds is Rs. 20,000, while for Bank of Baroda customers, the minimum amount is Rs.1 lakh.

You can opt for a minimum loan amount of Rs. 5000 through Finezzy.


Maximum Loan Amount

We can look at the maximum loan amount from two perspectives.

The maximum loan amount that the lender is willing to provide

The maximum loan amount that lenders are willing to provide will vary from one lender to another. For instance, the maximum loan for SBI is Rs. 5 crores for debt funds. So, even if you are willing to put in Rs 10 crores, you will only get a loan of up to Rs. 5 crores.


Portfolio Value

The second aspect is your portfolio value. It is natural that lenders won’t lend you more money than your portfolio value.

However, most lenders don’t provide 100% of your investment value as a loan. Typically, in the case of equity mutual funds, up to 50% of the NAV (Net Asset Value) can be availed as a loan against investments.

For fixed-income mutual funds, up to 70-80% of NAV (Net Asset Value) can be availed as a loan against your investments.

The value may vary from bank to bank and also depends upon the type of funds you own.

Let us take a look at this example.


Loan against your equity mutual funds

Suppose you have 10,000 units of ABC’s equity mutual fund. The NAV of the fund is Rs 50. The total value of your investments would be Rs 5,00,000. You can get a maximum loan of Rs 2,50,000 (50% of NAV) against your investments from a bank or financial institution.


Loan against debt mutual funds

Now let’s suppose you have 12,000 units of XYZ debt mutual fund. The NAV of the fund is Rs 70. The total value of your investments would be Rs 8,40,000. As it is a debt fund, you can avail of around 70-80%, i.e., in the range of Rs 5,88,000 to Rs 6,72,000, as a loan against your investments. The figures may vary from one bank to another.


Benefits of Taking a Loan Against MFs

There are a number of pros to taking a loan against MF securities including the typically competitive loan against mutual funds interest rate, making it an economically wise choice. These are:

  • Easy, hassle-free process
  • The completely digital process of availing of a loan
  • You earn returns on assets even when you’ve taken a loan
  • Ownership of assets remains with you
  • Lower interest rates than other personal loans
  • Easy repayment terms                                                                                                                                   

    Do you want to learn more? Delve deeper into ‘Understanding the Basics of Loan Against Mutual Funds and Its Benefits’ to grasp the key aspects and advantages.


Disadvantages of Taking a Loan Against Mutual Funds

Though it is a great facility for unit holders, it is not free from certain limitations. These are:

  • You may lose your assets on non-repayment of the loan amount
  • The loan facility is usually available for shorter periods


Final Words

A loan against mutual funds is convenient when you need emergent funds. Not only do you pay lower interest rates, but also you enjoy the ownership of assets.

However, the amount you’d get against your securities will depend on the type of MFs held and the lending institution’s terms and conditions.

Make sure that you check all the terms and conditions before applying for a loan.

Frequently asked questions

All investments have some risk. But mutual funds try to reduce risk by investing in many different things. So, if one thing doesn’t do well, the other might make up for it.

We tailor our advice and suggestions to your needs. If wealth management is your goal, our algorithms go through millions of data points to come up with suggestions that sit perfectly with your risk appetite, existing financial goals and the prevailing market conditions. If you are interested in credit, we address the need while also ensuring you do not compromise on your broader financial goals.

Most mutual funds let you take out your money when you want. But some might have rules or charges if you take it out too soon.

To start, you can talk to a bank or a financial advisor. They can guide you on how to put your money in a mutual fund.

Yes, there might be some charges. These are for managing the fund and other services. It’s good to ask about these before you invest.

No, you don’t need a lot of money. Many mutual funds allow you to start with a small amount as low as INR 500.