Mutual funds have become one of the most popular investment choices for people looking to grow their wealth systematically. They offer diversification, professional management, and the potential for attractive returns. But what many investors don’t realize is that mutual funds can also be leveraged to meet urgent financial needs without liquidating the investment. This is possible through a loan against mutual funds (LAMF).
However, before you apply for such a loan, the most important step is to understand how the value of your mutual funds is assessed for loan eligibility. The process may sound complicated at first, but with the right information, it becomes easy to navigate. In this guide, we’ll break it down in a simple, user-friendly way so you can confidently evaluate your mutual fund holdings and know how much funding you may qualify for.
What Does Loan Against Mutual Funds Mean?
A loan against mutual funds allows you to pledge your mutual fund units as collateral to secure a loan from a bank or non-banking financial company (NBFC). Instead of redeeming your mutual funds (which may lead to capital gains tax and interrupt your wealth-building journey), you keep your investments intact while accessing liquidity.
The lender evaluates the value of your pledged mutual funds and then determines the eligible loan amount based on a certain percentage of this value, called the Loan-to-Value (LTV) ratio.
Why Understanding the Value of Your Mutual Funds Matters
Before pledging your mutual funds, it’s crucial to know how lenders will look at their value. This helps you:
- Estimate the maximum loan you can expect.
- Decide whether pledging mutual funds is a better option than redeeming them.
- Plan your finances effectively, especially during emergencies.
- Avoid disappointment in case the eligible loan is lower than expected.
Step 1: Know Your Mutual Fund’s Current Value
The first step in assessing loan eligibility is checking the Net Asset Value (NAV) of your mutual fund units. NAV is the per-unit price of a mutual fund, updated daily.
Here’s a simple formula to calculate the total value of your mutual fund holdings:
Value of Mutual Fund Investment = Number of Units Held × Current NAV per Unit
For example:
- If you hold 1,000 units of an equity mutual fund with an NAV of ₹50, the value is ₹50,000.
- If you hold 2,000 units of a debt mutual fund with an NAV of ₹25, the value is ₹50,000.
By knowing the combined value of all the mutual funds you plan to pledge, you get a clear starting point.
Step 2: Understand the Loan-to-Value (LTV) Ratio
Lenders don’t offer loans equal to the full value of your mutual funds. Instead, they follow an LTV ratio, which determines the percentage of your mutual fund’s value that can be given as a loan.
Typically:
- Equity Mutual Funds → 50–60% LTV
- Debt Mutual Funds → 70–80% LTV
This difference exists because debt funds are considered less risky than equity funds, which are subject to market volatility.
Example:
Suppose you hold equity mutual funds worth ₹1,00,000. With a 50% LTV, you may be eligible for a loan of ₹50,000. On the other hand, if you pledge debt funds worth ₹1,00,000 with a 75% LTV, you could get up to ₹75,000.
Step 3: Check Which Mutual Funds Are Accepted
Not all mutual funds are accepted by lenders. Most banks and NBFCs have a list of approved funds. Generally, top-rated mutual funds from reputed asset management companies (AMCs) are accepted, while niche or less liquid funds may not qualify.
Before you plan your loan, check with your lender whether the specific schemes you hold are eligible for pledging.
Step 4: Look at Market Conditions
Market fluctuations can directly impact the NAV of your equity mutual funds. Since loan eligibility is tied to the current value, a market downturn may reduce your eligible loan amount.
For example:
- On Monday, your equity fund units are valued at ₹2,00,000, making you eligible for a ₹1,00,000 loan (50% LTV).
- By Friday, due to market corrections, the value drops to ₹1,80,000, lowering your eligibility to ₹90,000.
This is why debt mutual funds often provide more stability for loan calculations.
Step 5: Factor in Lender-Specific Policies
Different lenders may have different rules, including:
- Minimum and maximum loan amount.
- Processing charges and interest rates.
- Daily monitoring of pledged fund values.
- Top-up or margin calls if the fund value falls.
For instance, if your mutual fund value falls significantly, the lender might ask you to either pledge more units or repay part of the loan to maintain the LTV ratio.
Step 6: Use Online Loan Calculators
Many lenders and financial websites provide loan against mutual fund calculators. These tools let you enter details like the type of fund, NAV, and number of units to quickly estimate your eligible loan amount. Using a calculator saves time and provides a realistic picture.
Example Calculation
Let’s put all of this together with an example:
You hold the following mutual fund investments:
- 1,500 units of an equity mutual fund with NAV of ₹60 → Value = ₹90,000
- 2,000 units of a debt mutual fund with NAV of ₹30 → Value = ₹60,000
Total Investment Value = ₹1,50,000
Now applying LTV ratios:
- Equity fund @ 50% = ₹45,000 loan eligibility
- Debt fund @ 75% = ₹45,000 loan eligibility
Total Loan Eligibility = ₹90,000
Step 7: Compare with Other Loan Options
Assessing your mutual fund value also helps you compare this option with other credit facilities like personal loans or credit cards. For many investors, a loan against mutual funds is more cost-effective because:
- Interest rates are usually lower than personal loans.
- You pay interest only on the amount utilized.
- Your mutual fund investment continues to grow.
Things to Keep in Mind
- Loan repayment discipline: Failure to repay on time may lead the lender to sell your pledged units.
- Tax benefits: Unlike redeeming mutual funds, taking a loan does not attract capital gains tax.
- Credit score impact: Repaying on time can improve your credit history, while defaults can damage it.
- Short-term solution: Loans against mutual funds are best for short-term liquidity needs, not long-term borrowing.
Conclusion
Mutual funds are more than just wealth-building tools they can also serve as a safety net during unexpected financial needs. To assess the value of your mutual funds for loan eligibility, start by calculating the current value of your units using NAV, apply the lender’s LTV ratio, and consider factors like approved schemes, market conditions, and lender policies.
By doing this homework, you’ll have a clear understanding of how much funding you can access without redeeming your investments. This not only keeps your long-term goals intact but also provides financial flexibility when you need it most.