Loan Against Mutual Funds vs. Loan Against Shares

Loans against investments like mutual funds and shares provide individuals with an efficient way to access quick financing without liquidating their assets. These loans allow you to leverage your investments to meet personal or business needs while still retaining ownership. This article explores what loans against mutual funds and shares entail, their benefits, associated risks, and how to decide which option is right for you.

What is a loan against mutual funds?

A loan against mutual funds allows investors to pledge their mutual fund units as collateral to secure a loan. The lender provides a loan amount based on the current Net Asset Value (NAV) of the pledged mutual fund units, which generally ranges up to 50% of the asset value. This type of loan is ideal for individuals looking for quick financing without redeeming their mutual fund investments. To learn more, check out our detailed guide on loan against mutual funds.

What is a loan against shares?

A loan against shares is a financing option that allows individuals to pledge their equity shares as collateral to secure a loan. The loan amount is determined based on the market value of the pledged shares, usually upto 50% of the asset value as per RBI guidelines. This loan enables investors to meet financial needs while still holding their shares, allowing for potential market appreciation.

Key differences between loan against mutual funds and loan against shares

Aspect	Loan Against mutual funds	Loan against shares
Collateral	Mutual fund units	Equity shares
Loan amount	Upto 50% of mutual fund NAV	Upto 50% of share market value
Interest rates	Generally lower than shares	lightly higher due to market volatility
Risk of margin call	Lower, depends on NAV fluctuations	Higher, due to stock market volatility
Ownership	Retained by the investor	Retained by the investor
Processing time	Typically shorter	May involve more documentation

Benefits of a loan against mutual funds

• Quick processing: Lenders are likely to approve loans against mutual funds swiftly, thanks to the collateral's stability.

• Retain investment: Investors do not need to redeem their mutual fund units, allowing them to continue benefiting from market growth.

• Lower interest rates: Due to the lower risk associated with mutual funds, lenders generally offer more favourable interest rates.

• Flexible repayment: Borrowers can choose flexible repayment options, including bullet payments or equated monthly instalments (EMIs).

Benefits of a loan against shares

• Access to quick funds: Borrowers can quickly obtain funds without selling their shares, preserving their long-term investment strategy.

• Flexible usage: The loan amount can be used for various purposes, such as personal expenses, business investments, or debt consolidation.

• Ownership retention: Investors continue to hold their shares and can benefit from any potential appreciation in their market value.

• Flexible repayment options: Lenders usually provide multiple repayment options, allowing borrowers to repay based on their financial situation.

Risks and considerations for loans against mutual funds

• Market risks: Although mutual funds are relatively stable, their NAV can fluctuate based on market conditions, potentially affecting the loan's value.

• Interest payments: Regular interest payments are mandatory, which can be a burden if not managed properly.

• Possible margin call: If the mutual fund's value drops significantly, the lender might request additional collateral or partial repayment.

Risks and considerations for loans against shares

• High market volatility: Share prices are subject to high market volatility, which can significantly affect the loan-to-value ratio.

• Margin calls: A decrease in share value may lead to a margin call, requiring the borrower to provide additional funds or collateral.

• Interest costs: The cumulative interest cost over the loan tenure can be substantial, particularly if the loan is extended for a longer period.

How to choose between loan against mutual funds and loan against shares

When deciding between a loan against mutual funds and shares, consider the following factors:

1. Risk tolerance: Loans against shares are riskier due to market volatility. If you prefer stability, a loan against mutual funds may be more suitable.

1. Loan amount: Mutual funds typically allow for a higher loan amount upto 50% of the asset value as they are considered less volatile than shares.

1. Interest rates: Check the interest rates offered by lenders for both options. Loans against mutual funds usually have slightly lower rates.

1. Repayment flexibility: Compare the repayment options provided for each type of loan to align with your financial situation.

1. Future financial goals: Consider how using your shares or mutual funds as collateral might impact your long-term investment goals.

For more information on interest rates, visit our guide on loan against mutual funds interest rate.

Application process for loan against mutual funds

To apply for a loan against mutual funds, follow these steps:

1. Choose a lender: Select a financial institution that offers competitive interest rates and loan terms.

1. Fill out the application: Complete the loan application form, providing details of your mutual fund investments.

1. Submit documents: Provide the necessary documents, such as identity proof, mutual fund account statement, and KYC documents.

1. Pledge mutual fund units: The lender will initiate the process to pledge your mutual fund units as collateral.

1. Loan disbursal: Acter verification your loan will be approved, and the loan amount will be disbursed to your bank account.

Application process for loan against shares

To apply for a loan against shares, follow these steps:

1. Choose a lender: Research and select a lender that offers favourable interest rates and loan conditions.

1. Complete the application: Fill out the loan application form, including details of the shares you wish to pledge.

1. Submit required documents: Submit documents such as identity proof, demat account statement, and KYC details.

1. Pledge shares: The lender will facilitate the pledge of your shares as collateral for the loan.

1. Receive loan disbursal: Once the application is approved, the loan amount will be credited to your account.

Conclusion

Both loans against mutual funds and shares provide an effective way to leverage investments for financial needs without selling assets. Understanding the differences, benefits, and risks associated with each option can help you make an informed decision based on your financial goals and risk appetite. Whether you choose a loan against mutual funds for its stability or a loan against shares for potential market gains, these options offer flexibility and control over your finances.