A loan against securities platform lets investors access funds by pledging their mutual fund units as a security rather than selling their investments. This provides great liquidity for urgent expenses, along with keeping the investments in the same place. However, the cost of borrowing depends on multiple factors, so it is crucial for you to understand the factors influencing the rates of interest before applying for the loan.

How Do Loans Against Mutual Funds Work?

A loan against mutual funds is a secured loan where borrowers pledge eligible mutual fund units as collateral. They still have the ownership of the investments, but the units pledged remain under the lender until the loan is paid. Depending on the lender, both debt and equity mutual funds can be accepted as security.

The loan amount you can borrow depends on the value and type of the mutual fund scheme that you are providing as collateral. Lenders may also have different eligibility needs and might not accept every mutual fund scheme. For instance, mutual fund schemes such as ELSS units during the lock-in period might not be eligible for a loan.

Factors Affecting The Interest Rate

There is not a single interest rate that applies to each borrower. A loan against mutual fund interest rate may vary depending on the lender, the borrower profile, the mutual funds pledged, the loan amount and the repayment period. Lenders monitor these factors while deciding the price of the loan.

• Kind of mutual fund

The type of mutual fund you pledge influences the rate of interest offered. Debt, equity and other fund categories may come with different liquidity and risk characteristics. As the investment itself acts as collateral, lenders consider the nature of these holdings when evaluating the loan.

The value of the pledged units also matters because the maximum loan amount offered to the borrower is linked to the value and type of the mutual schemes. However, the exact limit differs from one lender to another.

• Lender's policies

Different lenders offer different risk policies and pricing. NBFC's, banks, online loan apps and other financial institutions may provide different interest rates for similar loans. A lender's approach to collateral, loan structure, and borrower risk can affect the rates you receive. This is why comparing offers only by considering the interest rate is not enough. It is also important to understand the way interest is charged, how repayment works and what fees apply.

• Financial profile of the borrower

Your financial profile also influences the rate of interest you receive. Stable income and strong credit history may help borrowers receive a competitive rate. Moreover, lenders also consider the overall financial profile of the borrower in addition to the pledged investments.

However, the benefit of this kind of secured borrowing is that loans against mutual funds are also available to first-time borrowers, including those without a well-established credit history, depending on the eligibility criteria of the lender.

• Loan amount repayment period

The loan amount you borrow and the repayment period also affects the loan against securities interest rate. Your loan amount is generally linked to the value of the mutual funds that you have pledged. While the repayment period is part of the lender's loan structure, you must also check if the rate of interest is charged on the entire sanctioned amount or only on the amount you actually use. Certain loan structures charge a rate of interest only on the amount the borrower has utilized, which makes the borrowing cost highly flexible.

Conclusion

The rate of interest you pay on a loan against mutual funds is influenced by multiple factors rather than only the amount you have borrowed. The value and type of mutual fund holdings, your financial profile, the policy set by the lender, and the loan amount along with the repayment period can all affect the rate of interest offered. Therefore, before you select a loan, make sure to compare the complete borrowing structure offered by different lenders instead of only focusing on the interest rate.

Also, understand the repayment terms, interest calculation, charges, and risks, as this can help you make an informed borrowing decision. A loan against mutual funds online can also help financial platforms streamline the digital lending process and make such borrowing experiences more convenient.