3 min read
June 11, 2024

Table of Contents

3 min read
June 11, 2024

Myths and Facts About Loan Against Mutual Fund

Loans against mutual funds are not as widely understood as they should be, especially considering the huge potential they offer in the financial market. 

According to the Reserve Bank of India, as of FY24, the total loans issued against shares, bonds, and mutual funds amount to about INR 50,000 Crore. In contrast, the total assets under management (AUM) in the mutual fund industry have reached an impressive INR 50 lakh crore. If even 1% of these AUMs, which would be INR 50,000 Crore, becomes available for lending, the market could see a 300% increase from the current figures. This could translate into a massive INR 25,000 Crore in loans. 

With so much potential, it's crucial to address common concerns and questions investors have about this financial strategy.

Myth 1: Applying for a Loan Against Mutual Funds is Complicated

Fact: The application process is user-friendly and often digital, enabling quick access to funds without the hassle of traditional loan applications. Financial institutions have streamlined the process to include minimal paperwork, and the evaluation of mutual fund units is mostly automated, speeding up approval times.

Why It’s Important to Address: This myth can deter investors who need quick liquidity but are intimidated by perceived bureaucratic hurdles. Clarifying the simplicity encourages you to consider this option over selling their investments, especially in volatile markets where selling might not be favourable.

For businesses interested in offering Loan Against Mutual Funds (LAMF) to their users, Finsire's APIs greatly simplify setting up the end-to-end process. Using APIs from key registrars like CAMS, KFintech, and MFCentral, companies can integrate these solutions to enable LAMF disbursement in as little as five minutes. This makes it an incredibly efficient option for businesses to provide value-added services to their clients.

Myth 2: You Risk Losing Your Mutual Funds

Fact: The mutual funds serve as collateral but remain under your name; you do not lose ownership unless there is a default on the loan. The funds can continue to appreciate in value, and any dividends or returns still accrue to the investor. The risk of actual loss is contingent on failure to repay, which is standard across secured loans.

Why It’s Important to Address: Investors often confuse pledging with liquidation. Understanding that they retain ownership and potential gains can make this financing option more attractive, especially for those looking to preserve their long-term investment strategy while addressing short-term financial needs.

Myth 3: High Interest Rates Make It Unfeasible

Fact: Interest rates for loans against mutual funds are generally lower than those for unsecured loans like personal loans or credit cards because they are backed by tangible assets. This security reduces the lender's risk, which is reflected in more favourable interest rates.

Why It’s Important to Address: The misconception about high costs can prevent investors from taking advantage of this cost-effective borrowing method. Knowing that these loans can offer significant savings on interest encourages more strategic financial management.

Myth 4: Only Large Loans Are Available

Fact: The amount you can borrow is flexible, typically ranging from 50% to 80% of the value of the pledged mutual fund units, depending on the lender's policies. This allows for both large and small loans, making it a versatile solution for various financial needs, from covering an unexpected expense to financing a large project.

Why It’s Important to Address: This flexibility is a key benefit, yet many potential borrowers assume that only large sums are accessible. Correcting this myth opens up opportunities for more investors to use this option, tailoring the loan size to their specific needs without over-borrowing.

Myth 5: Suitable Only for Short-term Financial Needs

Fact: While the quick access to funds makes it ideal for short-term needs, the terms of loans against mutual funds can be adjusted for longer periods, depending on the lender's offerings and the borrower's repayment capacity. This makes it suitable for both immediate cash flow issues and long-term financial planning such as funding children’s education or major life events.

Why It’s Important to Address: Expanding understanding of the loan's versatility challenges the narrow perception that these are only for emergencies. It encourages investors to think of these loans as part of a broader financial strategy, leveraging their assets without liquidation and aligning borrowing with both short and long-term financial goals.

Also Read: 6 Things to Know about Loan against a Mutual Fund

To Conclude

Loans against mutual funds represent a sophisticated yet accessible financial tool that can adapt to a variety of financial situations, maintaining your investments active and appreciating while providing the cash flow you need. 

This article has debunked several prevalent myths, offering clear facts that highlight the benefits and flexibility of these loans. For investors, understanding that these loans provide a way to access funds quickly and affordably, without forfeiting the growth potential of their investments, is crucial. 

For businesses, incorporating Finsire's APIs into their services transforms the way they can offer loans against mutual funds, making the process swift and seamless—potentially in just minutes. This combination of convenience, efficiency, and strategic financial management makes loans against mutual funds an invaluable option for both individuals and companies aiming to maximize their financial resources and opportunities.

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