What is Loan Against Mutual Funds (LAMF)? Learn LAMF Meaning, Charges & Rates
Let’s picture this: you have a stash of mutual funds that have been diligently growing over time, but suddenly, a pressing need for cash emerges. Whether it’s funding an education, starting a business, or meeting unforeseen expenses, we often find ourselves in need of immediate funds. Fret not, this is where LAMF or Loan Against Mutual Funds swoops in. You can think of it as your trustable financial sidekick.
So let’s have a look at the world of LAMF and how it can help you.
What is Loan Against Mutual Funds?
Loan Against Mutual Funds (LAMF) refers to a financial arrangement. Via LAMF individuals can utilize their mutual fund investments as collateral to obtain a loan from a financial institution or lender. With smallcase, you can easily lien mark your mutual funds(MF) digitally and get an instant loan. By doing so, you do not have to sell or redeem your loan against mutual fund investments to access liquidity.
The loan is offered in the form of an overdraft facility. It provides you with the flexibility to access the funds you require. Additionally, you may repay them at your convenience, without any additional charges. The rate of interest on a LAMF is levied solely on the amount you utilize and its duration.
However, when it comes to collateral, you have the freedom to select from a diverse range of approved mutual funds. Various asset management companies (AMCs) in India offer these. Therefore, to secure the loan, you can mark a lien on MFs registered with CAMS and KFintech (previously known as KARVY). These are trusted Registrars & Transfer Agents (RTAs).
For those seeking short or medium-term financial solutions, we highly recommend considering a loan against MF online.
Who Can Apply for Loan on Mutual Funds?
Let’s have a look at the loan against mutual fund online eligibility and documentation.
Loan Against Mutual Funds Eligibility
Loan against mutual fund investments is a flexible financing option in the share market. It caters to a wide range of individuals and entities. Whether you are a resident of India or an individual investor, this avenue opens its doors to support your financial needs. However, minors are not eligible for this facility. The loan against mutual funds interest rate is determined by the bank/financial institution considering the applicant’s credit score primarily.
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Loan Against Mutual Funds Required Documents
When applying for a loan against MFs, investors are required to provide essential documentation as part of the application process. These include:
- Proof of identity
- Proof of address
- Proof of employment
- Documentation confirming the ownership of the mutual fund investments.
However, at smallcase, we’ve revolutionized this experience by seamlessly integrating documentation into our digital workflow.
You may also like to read – Who can apply for LAMF?
How to Take Loan Against Mutual Funds?
Applying for a loan has been one of the most difficult challenges for quite some time. But not anymore. Follow this step-by-step guide to opt for a loan against mutual funds online.
If you happen to hold units in a Demat account and have obtained prior permission, numerous online portals can grant instant approval for loans. However, if your funds exist in a physical form, you have two viable options. The first choice entails establishing a loan agreement directly with the financier or bank. While the second option involves converting the physically held units into an electronic format. In order to secure the pledged shares/units, the lender bank asks the mutual fund registrar such as CAMS or Karvy to mark a lien on the specific quantity of units. In the end, the registrar then proceeds to stamp the lien and sends a confirmation letter to the lender. Along with a copy forwarded to the borrower.
However, it is important to note that the lien applies specifically to the number of units held within the scheme.
Apply for a Loan Against Mutual Funds on smallcase
It is super breezy to apply for a LAMF on smallcase; all you need to do is –
- Import & select the mutual funds you want to use as collateral
- Add a bank account for receiving funds and monthly interest auto-debit
- Pledge your holdings with the lender
- Sign the loan agreement online
And you’re done! Check your eligibility today; download the app to know more.
Apply for a loan today
Lien on Mutual Funds
Before proceeding with the loan application, it’s crucial to grasp the concept of a lien on mutual funds. A lien is a document that empowers the lender to either sell or retain the fund. When you designate the lender as the owner of your fund units, you create a claim in their name.
To establish the lien, contact the fund house and request the lender’s name to be added to your units. This request must be signed by all unit holders.
Once the loan is settled, the lender can request the fund house to release the lien. In case of partial payment, you can opt for a partial lien removal, freeing some units while others remain under claim. Failure to repay the loan as agreed allows the lender to reinstate the lien, and the same applies in the case of default. In such instances, the lender can ask the mutual fund to redeem the units and send the proceeds to them.
What are the Factors You Should Consider Before Investing in a Loan Against Mutual Funds (LAMF)?
These are some of the factors that you should consider before investing in a loan against MF.
- Impact on Investment Portfolio and Returns: This means that if you default on the loan, the lender has the right to sell your investments to recoup their losses.
- Risks Associated with Loan Defaults and Margin Calls: If you are unable to repay the loan, the lender may call a margin call. This means that they will require you to either add more collateral or sell some of your investments to cover the outstanding balance.
- Importance of Understanding Loan Terms and Conditions: Before you take out a loan against your mutual funds, it is important to understand the interest rate, repayment period, any prepayment penalties, and the risks associated with defaulting on the loan.
How Does a Loan Against Mutual Funds Work?
You can use your mutual fund units as collateral for a loan through a loan against securities. The lender will hold your mutual fund units as collateral until you repay the debt. During this period, your mutual funds will still earn interest, but you won’t be able to sell them.
You cannot withdraw your mutual funds until you repay the loan. However, you will keep receiving dividends. Once you fully pay the loan, the lender may request the fund house to release the lien. If the lender receives half the payment, you can also partially release the lien, allowing some units to be free while the rest remains as collateral or approved securities.
What are the Benefits of Investing in OD Against MFs?
There are several benefits of getting a overdraft against mutual funds, some of the benefits of LAMF include:
- Access to Cash: LAMF can provide you with access to cash when you need it. Furthermore, without having to sell /liquidate your investments. This can be helpful for meeting short-term financial needs, such as a down payment on a house or a medical emergency.
- Lower Interest Rates: The interest rates on credit cards and personal loans are typically higher than loans against mutual fund interest rates. Thus, adopting LAMF can save you money on interest payments.
- No Prepayment Penalties: Most LAMFs do not have prepayment penalties. This means that you can repay the loan early without having to pay any additional fees.
- Flexible Repayment Terms: LAMFs typically have flexible repayment terms. This means that you can choose the repayment period that best suits your needs.
How Much Loan Will You Get Against Mutual Funds?
The amount that you have withdrawn or the outstanding loan amount cannot be greater than 45% of the pledged equity Mutual Funds and 85% of the pledged debt Mutual Funds. The loan amount depends on the value of the mutual funds you will keep as collateral. You can avail a LAMF at smallcase from ₹25,000 to ₹5 crore.
What are the Charges and Interest Rates of Loan Against Mutual Funds (LAMF)?
The charges and interest rates of LAMF vary from lender to lender. However, some typical charges and interest rates include:
- Processing Fee: This is a one-time fee that is charged when you take out the loan. Therefore, at smallcase, the processing fee is ₹999 or 1% of the loan amount, whichever is higher, with a maximum cap of ₹4999 (GST will be applied). For example, ₹999 + GST (loan less than 1 lakh), 1% of sanctioned amt + GST (loan between 1 to 5 lakh), and ₹4999 + GST (loan greater than 5 lakh.
- Interest Rate: The interest rate on a LAMF is typically lower than the interest rate on other types of loans, such as personal loans or credit cards. The interest rate can range from 8% to 18% per annum. However, the loan percentage offered by smallcase starts from 10.75% per annum.
- Early Repayment Fee: Some LAMFs have early repayment fees. These fees can be significant, so it is important to read the terms and conditions carefully before you take out a loan.
Why Loan Against Mutual Funds Can Be a Better Debt Option?
The rising interest on loans has urged many to look at their debt options. Many are forced to pay high EMIs for an extended tenure as people rely on multiple traditional options that are already available in the market. When it comes to choosing a debt option, Loan Against Mutual Funds (LAMF) emerges as a shining star, outshining personal loans and credit cards in numerous ways.
First and foremost, LAMF offers significantly lower interest rates compared to personal loans or credit cards. You can now say goodbye to sky-high interest rates that can drain your financial resources! With personal loans, you may face restrictions on the usage of funds. In contrast, LAMF offers you the freedom to utilize the loan amount as per your needs.
Moreover, LAMF boasts faster processing times and minimal documentation requirements. Unlike the lengthy and cumbersome procedures associated with personal loans or credit cards.
Also, read about: Loan against mutual funds or Personal Loan – which is better?
To Wrap it Up…
With the advent of online digitalisation, you can avail for a loan and get funds without following an extensive process by opting for Loan Against Mutual Funds (LAMF). In addition to the desired amount of debt, a loan against mutual funds allows you to continue investing in mutual funds that can later be repurchased for reinvestment or saved as a corpus.
FAQs
Yes, a loan against mutual funds (LAMF) is a better debt option when compared to personal loans and credit cards. By availing a loan on MF, you get to choose your desired debt amount. It offers a great repayment facility, unlike the above-mentioned traditional loans.
Yes, you will continue to receive dividends even if you’ve taken an instant Loan Against Mutual Funds (LAMF).
A lien on mutual funds is a legal right that allows a lender to take possession. When you take out a LAMF, the lender marks a lien. This means that the lender has the right to sell your mutual funds to recover the outstanding balance of the loan if you default.
It is possible to remove the lien of LAMF if the amount is repaid to the borrower by sending a request letter to the fund house. Alternatively, the financier can request partial removal of the lien.
You can remove the LAMF lien by repaying the amount and sending a request letter to the fund house. Alternatively, the financier can request partial lien removal with part payment. This would result in the units being referred to as ‘free units.’
ELSS mutual funds have a lock-in period of 3 years, during which time you cannot sell or redeem your units. This makes them ineligible for loans against securities (LAS), which require borrowers to pledge their securities as collateral.
Yes, you can take a loan against equity mutual funds.
Yes, you can take a loan against index mutual funds without any hassle.
A loan against flexi mutual funds is a secured loan that allows you to borrow money against the value of your flexi mutual fund units.
An overdraft or OD against mutual funds (LAMF) refers to the ability to withdraw funds up to a pre-approved limit against the value of your pledged mutual fund units.
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