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Loan Against Mutual Funds for Working Capital: A Comprehensive Guide
2 mins Read | 2 Days Ago
A Loan Against Mutual Funds is a smart way to access quick funds for business needs without liquidating your investments. By pledging your Mutual Fund units with a bank, you can secure a loan while still retaining ownership of your assets. This flexible financing option helps you manage working capital efficiently, ensuring business continuity without disrupting your investment growth.
Read this blog post to learn everything about using a Loan Against Mutual Funds for meeting working capital needs in India.
Loan Against Mutual Funds for Working Capital Needs
Introduction A Loan Against Mutual Funds for working capital means taking funds from a bank by pledging your Mutual Fund units and using the money for the business.
The Net Asset Value (NAV) of the pledged Mutual Fund(s) is used by the bank to sanction the loan amount. The interest rates for this loan are often lower as it is secured by your investments. The main benefit here is that you don’t need to sell the investments and continue to earn returns on them.
Loan Against Mutual Funds for Working Capital Needs: Features
- You get access to instant loan approval with minimal documentation
- You can continue earning dividends and benefit from capital appreciation, even while keeping your Mutual Fund units as collateral
- The loan amount is based on the Net Asset Value (NAV) of the pledged Mutual Funds
- The overdraft facility on a Loan Against Mutual Funds allows you to withdraw funds as needed, with interest charged only on the amount utilised
- Minimal documentation makes it a seamless funding option.
Things to Remember When Securing a Loan Against Mutual Funds
Before securing a Loan Against Mutual Funds, it’s important to understand a few factors, in order to make informed borrowing decisions.
Assess Your Loan Needs
When considering a loan application for a Loan Against Mutual Funds for working capital, it's important to evaluate the amount of money you need for the business. Try not to borrow more than your needs as it could result in increased repayments and add strain to your financial situation.
Choose the Right Mutual Funds for Collateral
Not every Mutual Fund qualifies as collateral for a loan. Lenders provide loans against approved Equity and Debt Mutual Funds that are registered with the Registrar and Transfer Agent (RTA) with whom the lender has an agreement. The major RTAs are CAMS (Computer Age Management Services) and KFin Technologies. Please check your Mutual Fund’s eligibility before applying for the loan from your desired lender.
Understand Loan-to-Value (LTV) Ratio
The Loan-to-Value Ratio shows the proportion of your Mutual Fund’s value that a bank can lend. Usually, it is between 50% and 80% of your Mutual Fund’s Net Asset Value (NAV). Make sure you grasp the significance of the LTV ratio before proceeding with the loan because it impacts the amount you can borrow.
Use the Loan for Productive Purposes
Taking a loan backed by Mutual Funds is best suited for purposes that can bring value, such as boosting your business growth. It's advisable to stay away from using the loan for unnecessary spending, to prevent potential financial challenges in the future.
Keep Track of the Performance of Your Funds
The value of your Mutual Funds can change over time and this can impact the loan amount you have taken against them. Monitor the performance of your Mutual Funds to make sure they stay valuable. If the market value of your Mutual Funds drops, you might need to offer more collateral or pay off some of the loan ahead of schedule
Steps To Apply for a Loan Against Mutual Funds with ICICI Bank
Internet Banking
- Log into your Internet Banking account with your username and password
- Go to the 'Cards & Loans’ section
- Select 'Loans' and choose the option for 'Loan Against Mutual Funds'
- Choose the Mutual Fund category for lien annotation
- Select the Fund(s) after deciding which one(s) you'd like to use as collateral for the Loan
- Make sure to include any information that the Bank needs from you regarding FATCA (Foreign Account Tax Compliance Act)
- Determine the Loan amount for your application. You can estimate the Loan amount by considering the worth of your Mutual Fund units and the Loan-to-Value Ratio set by the Bank
- After your Loan gets verified for approval successfully, you will have access to the funds through your new Overdraft Account.
iMobile App
- Log into the iMobile app
- Go to ‘Instant Loans / Offers’ and then choose ‘Loan Against Mutual Funds’
- Choose a Mutual Fund for marking the lien
- Select the Mutual Fund(s) you wish to offer as collateral for the Loan application
- Provide all required information, including FATCA details
- Once your Loan has been approved and finalised by the Bank, you will be able to withdraw the funds from your Overdraft Account as per your Loan agreement.
Conclusion
A Loan Against Mutual Funds is an excellent way to obtain liquidity for fulfilling working capital needs without selling your investments. It offers instant access to money with interest applied only on the utilised amount, along with flexible repayment choices. It is ideal for businesses and professionals who want to successfully manage cash flow by utilising Mutual Fund holdings while continuing to earn investment returns. However, before borrowing, you must analyse your repayment capacity and understand the loan conditions completely.
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