In today’s fast-paced financial world, individuals seek convenient ways to access liquidity without selling their valuable investments. One such option is taking a loan against mutual funds or shares.
This facility allows investors to leverage their existing assets to meet financial needs, without liquidating their portfolio. Let’s dive into how this works, the eligibility criteria, and the maximum limits associated with it.
What is a Loan Against Mutual Funds?
A loan against mutual funds enables you to borrow money by pledging your mutual fund units as collateral.
Rather than selling your investments during a cash crunch, this option allows you to maintain ownership of your assets while obtaining the liquidity you need. The loan is generally sanctioned as an overdraft or term loan, depending on the financial institution’s policies.
Benefits of Loan Against Mutual Funds:
- Continued Growth: You can still benefit from the market’s growth as your investments remain intact.
- Lower Interest Rates: Compared to personal loans, loans against mutual funds often come with lower interest rates.
- No Prepayment Penalties: Many lenders offer flexible repayment terms without prepayment penalties.
Loan Against Shares: Eligibility Criteria
To avail of a loan against shares, you must meet specific eligibility criteria. Financial institutions typically assess the following factors before approving a loan:
- Ownership of Shares: The applicant must own shares in their name, which will serve as collateral.
- Approved Shares: Not all shares are eligible; lenders usually accept shares of companies listed on recognized stock exchanges.
- Demat Account: The shares must be held in a Demat account to simplify the pledging process.
- Age and Residency: Applicants must be at least 18 years old and a resident of India.
Besides these requirements, the lender may consider your credit score, employment status, and financial background. Having a solid track record can enhance your chances of securing favorable loan terms.
Loan Against Shares: Maximum Limit
The maximum limit for a loan against shares varies across financial institutions and is influenced by the type of shares and their market value. Typically, the loan-to-value (LTV) ratio is set around 50% of the current market value of the shares. However, this percentage may fluctuate based on the volatility of the stock market, the lender’s policies, and the type of shares pledged.
For example:
- If you pledge shares worth ₹10 lakhs, the loan limit you may receive is around ₹5 lakhs, depending on the lender’s LTV ratio.
Factors Affecting the Loan Amount:
- Market Value of Shares: The loan amount is directly tied to the current market value of the shares.
- LTV Ratio: Lenders offer a loan based on a percentage of the market value of shares, typically 50%-60%.
- Portfolio Composition: A diversified portfolio of blue-chip stocks might help you secure a higher loan amount.
Things to Consider Before Taking a Loan Against Mutual Funds or Shares
- Market Fluctuations: Since your loan is based on market-linked investments, any dip in market value could lead to margin calls from the lender.
- Interest Rates: Always compare interest rates across lenders to secure the best deal.
- Repayment Terms: Understanding the repayment structure is crucial. Opt for a lender that offers flexible repayment options, allowing you to repay as per your convenience.
Conclusion
A loan against mutual funds or shares is an excellent way to unlock the potential of your investments and gain quick access to funds without liquidating your portfolio. Whether you need to meet short-term financial needs or tap into your investments’ value, this borrowing option provides flexibility with reasonable interest rates.
Connect with Divadhvik to explore more insights on how you can leverage your investments for financial growth!
