If you want to obtain instant funds for an emergency then using your investments can be a smart option. In this regard, securing a Loan Against Mutual Funds from leading banks like ICICI Bank can be the answer. You can use your investments as loan collateral and obtain funds from the bank. These are beneficial as you can borrow funds without selling off your investments upfront. It helps to get instant access to the money you need at that time without losing out on profits from the MFs.
It is important to know that if you pledge your securities as collateral for the loan then the general range is between 50% of the value. It is referred to as the Loan-to-Value (LTV) Ratio. The specific loan amount you qualify for will vary based on factors such as the type of securities you offer as collateral, their level of volatility and the current market conditions. Read this blog to learn about these factors influencing interest rates.
How does it work?
Here is how this type of loan works:
- You can borrow money by using your Mutual Fund investments as security through a loan against Mutual Funds.
- The value of your Mutual Fund units is used by the lender to calculate the amount of your loan. Even when your assets are used as collateral, you still receive returns on them.
Factors That Influence Loan Against Mutual Funds Interest Rates
- Type of Securities
The type of Mutual Funds pledged as collateral significantly impacts the interest rate offered by lenders. Equity Mutual Funds, being market-linked and volatile, generally attract higher interest rates, whereas debt Mutual Funds, which are more stable, often result in lower rates.
- Loan-to-Value (LTV) Ratio
The percentage of Mutual Fund value sanctioned as a loan impacts interest rates. A higher LTV may lead to higher rates, while a lower LTV can offer better terms due to reduced lender risk.
- Market Conditions
LAMF interest rates fluctuate based on overall market conditions. Factors like inflation, liquidity, and economic policies can influence borrowing costs.
- Market Conditions
The overall financial market situation can also impact the interest rate of a Loan Against Securities. For example, when the economic condition is steady and secure there might be lower interest rates. On the other hand, in times of market volatility interest rates may rise. Monitoring market conditions from time to time can assist in securing a favourable rate.
- CIBIL Score
For LAMF, lenders review credit history to assess past repayment behaviour, including any write-offs. While CIBIL score is checked, it has minimal impact on interest rates, as loan terms are primarily based on the pledged Mutual Funds.
- Loan Amount
Lenders may offer competitive interest rates on higher loan amounts, while smaller loans might attract slightly higher rates due to processing costs. However, since LAMF is an OD facility, interest is charged only on the utilised amount and duration.
- Keep Low-Risk Mutual Funds as Collateral
To secure a lower interest rate on a Loan Against Mutual Funds (LAMF), pledging low-risk Mutual Funds can be beneficial. Debt Mutual Funds, being more stable than equity funds, are considered lower risk, which may help in getting better loan terms.
- Negotiate With Your Lender
Maintaining a long-standing account connection with the lender and demonstrating a history of prudent borrowing habits with on-time loan repayments may help you achieve this. Don’t hesitate to speak openly with your lender and ask whether your good history of financial responsibility entitles you to lower interest rates.
Conclusion
Making wise financial decisions can be more helpful by knowing the factors that affect interest rates on loan on Mutual Funds. Rates are heavily influenced by factors such as tenure, loan-to-value ratio, Mutual Fund type and value, and lender rules.
Competitive rates are assured by selecting trustworthy lenders and keeping a high credit score. This loan option is perfect for short-term financial demands since it provides an affordable means of obtaining money without having to liquidate your investments. You can also minimise the costs and optimise the advantages of borrowing against your Mutual Fund assets by taking these considerations into account.
