How is the credit limit determined for Loan Against Mutual Funds?
For many individuals, delving into the realm of loans against mutual funds can be confusing. A fundamental question that often arises for many remains, ‘how is this credit limit computed?’ To put it simply, the process involves taking a percentage of the current market value of the mutual funds intended for pledging. Specifically, equity mutual funds offer a credit limit of 45%, while debt mutual funds offer a higher limit at 75%. This calculation establishes your borrowing capacity and the overall eligibility of a loan against your mutual funds.
Before we understand how the loan limit is determined, let’s quickly look at some of the reasons why you may choose a loan against mutual funds.
Benefits of Loans Against Mutual Fund
- Quick Short-Term Funding: LAMF provides swift access to short-term funds, serving as a reliable solution during times of financial need.
- Easy Repayment and Reasonable Interest Rates: The repayment process is user-friendly, and with the interest rate of 10.75% it makes a reasonable and cost-effective borrowing option compared to personal loans.
- Collateral Flexibility: Both debt and equity-based mutual fund holdings can be used as collateral, offering versatility in securing the loan.
- Investments Growth: While the loan is active, your mutual fund holdings remain untouched in your account, providing reassurance that your investments are still intact.
- Online Application and Minimal Paperwork: Applying for a loan against mutual funds is a hassle-free process. The online application is convenient, requiring minimal to zero paperwork.
- Rapid Disbursement: With LAMF, funds are disbursed swiftly within 2 hours, providing a crucial advantage during financial emergencies.
Which Mutual Funds are eligible?
- Extensive Mutual Fund Options: With over 6000+ approved mutual fund schemes in equity, debt, and hybrid categories, LAMF offers a wide array of choices for borrowers.
- AMC Eligibility: Loans can be availed against mutual funds from any Asset Management Company (AMC). A comprehensive list of approved schemes for each AMC can be found here.
Determining Loan Limits
When considering a loan against your mutual funds, the amount you can avail ranges from ₹25,000 to ₹5 crores. To ensure transparency and ease of access, smallcase provides an approved list of mutual funds that you can easily check on the smallcase app when considering a loan against mutual funds.
- Equity Mutual Funds – 45% Loan Limit: For equity mutual funds, the loan limit is 45% of the total value. For example, if you hold Rs. 1 lakh equity mutual funds, your loan limit would be Rs. 45,000.
- Debt Mutual Funds – 75% Loan Limit: Debt mutual funds offer a higher loan limit at 75%. With Rs. 1 lakh in debt mutual funds, your loan limit would be Rs. 75,000.
| Equity MF Market Value | Potential Loan Limit | Debt MF Market Value | Potential Loan Limit |
| 25,000 | 11,250 | 25,000 | 18,750 |
| 50,000 | 22,500 | 50,000 | 37,500 |
| 1,00,000 | 45,000 | 1,00,000 | 75,000 |
| 5,00,000 | 2,25,000 | 5,00,000 | 3,75,000 |
| 10,000,00 | 4,50,000 | 10,000,00 | 7,50,000 |
This clear breakdown ensures that borrowers can make informed decisions about their potential loan amounts based on the type of mutual funds they hold.
Conclusion
Knowing your potential loan limit is crucial for financial preparedness, offering a safety net during emergencies. Loans Against Mutual Funds provide a quick, reliable, and affordable way to access funds, making them an ideal choice for various financial needs.
