Loan Against Mutual Funds (LAMF): How it Works, Benefits & Interest Rates

When an emergency strikes, do you worry that you’ll have to sacrifice the potential of earning from your well-considered investments? That need not be the case! Previously, if you needed cash fast, you’d probably have to turn to selling your mutual funds. But here’s a smarter answer: a loan against mutual funds! 

Pledge your units, unlock liquidity, and keep on investing. Pay interest of 8% - 15% p.a. only on the amount that is used; borrow against tomorrow's returns. Do it all while safeguarding your long-term wealth! Learn what a loan against mutual funds is, how it works, eligibility to apply and more.

Quick Synopsis

• Even if you take a LAMF, your mutual funds remain invested in. This lets you benefit from compounding and resulting market appreciation.
• LAMF is a secured loan option, and thus, interest rates (typically 8% to 15% p.a.) are lower than those associated with unsecured options like personal loans/credit cards.
• The loan process is mostly digital and quick. These funds are disbursed within hours/days.

How LAMF Works & the Steps to Apply

A loan against mutual funds requires you to pledge your mutual fund units in the form of back-up or security. The lender in this case disburses the funds based on their then market value. The units stay lien-marked up until you repay the loan amount in full. 

Earn dividends and NAV that appreciates during the loan period. However, note that you won't be able to redeem/sell the units which have been pledged. Only after repaying the loan completely is the lien relaxed.

Here are the steps on how to take a loan against a mutual fund:

Step 1: Check your credit limit to know how much you can borrow at once against your investments. Paperwork is not needed, eliminating the usual hassle.

Step 2: Abide by the one-time KYC verification requirement to activate this loan facility. 

Step 3: Pledge mutual fund units by choosing the ones which are eligible. Your investments shall continue to grow even while you borrow.

Step 4: Withdraw and repay anytime that’s convenient for you. You shall have your funds credited instantly into your account. Repay in full or in parts. No foreclosure fees shall apply!

Key Benefits of Loan Against Mutual Funds

It might be an emergency situation or even a short-term requirement, but the LAMF, either way, is a low-stress measure to accumulate capital. Here are the other key benefits associated with LAMF:

Low Interest Rates

LAMF is a secured form of loan. Therefore, the interest rates are lower than personal/business loans.

Easy Access to Funds During Emergencies

You can apply via a quick and easy process, which is mostly online. It necessitates minimal documentation only. You can also get access to your funds almost immediately.

No need to sell your MFs

Your investments shall remain intact, and yet, you benefit from potential returns. You don't completely sacrifice ownership in this scenario.

Pay Interest on the Amount Used Only

You shall only have to pay interest on the amount you withdraw, instead of on the total granted limit.

LAMF Interest Rates & Other Applicable Charges  

LAMF Eligibility 

• Age Requirement: 18 years - 80 years.
• CIBIL Score Criteria: LAMF lenders typically do not check for credit scores, as they can sell pledged funds if only the individual defaults. So, the credit score cut-offs are not disclosed. However, lenders like Bank of Baroda have a set minimum CIBIL score criterion of 701, but scores of (-1) or (0) are also eligible to apply.
• Entities Eligible: Salaried & self-employed individuals/ proprietorships/ companies/ trusts/ NRIs/ partnerships/LLPs, and HUFs may apply for a loan against mutual funds. Certain banks only offer the LAMF facility to applicants who have a current/savings account with the respective lender.
• Condition: The mutual funds which are pledged must be from recognised/approved AMCs.

Documents Required for LAMF 

• ID Proof (Aadhaar Card/Driving Licence/ Voter ID/Passport)
• Address Proof (Aadhaar Card/Driving Licence/ Voter ID/Passport)
• Pledge form needed for the creation of the pledge
• Signature Proof (Banker sign verification/PAN card/Passport)
• Self-attested statement for the mutual fund 
• Current statement of holdings for the concerned mutual funds

Who Should Avail the LAMF? 

• Mutual fund investors who have poor credit scores/are facing high interest rates on personal loans
• One frequently faces a shortage of funds/cash flow mismatches
• Individuals who need an overdraft facility, but credit score checks might put them in a compromised spot

Conclusion 

A loan against mutual funds shall serve as a lifeline for anyone needing liquidity without selling off the investment devices. However, the option comes with conditions like potential margin calls and periodic revaluation. Yet it offers an alternative to personal loans, specifically for those who have poor credit scores. Borrowers can weigh the benefits against the risks as per their circumstances, alongside the lender's terms, before pledging the mutual fund units.

Want to make sure that your savings keep growing so you don’t necessarily ever have to come to a point of selling your MFs? Invest in secure, high-interest Fixed Deposits on the Stable Money app, so your money grows with you!