What is Loan Against Mutual Funds (LAMF)? Learn LAMF Meaning, Charges & Rates
Investing in mutual funds offers numerous benefits, such as convenience, diversification, and the potential for long-term gains. But did you know that mutual funds can also provide you with financial flexibility when you need it most? Introducing Loan Against Mutual Funds (LAMF) – a secured lending option that allows you to leverage your existing mutual fund investments to access funds when you need them.
Therefore, in this blog, we will explore what is LAMF, including its application process, eligibility, required documentation, key benefits, and much more. Let’s begin.
What is a Loan Against Mutual Funds?
A Loan Against Mutual Fund (LAMF) is a type of Loan Against Security (LAS). It is a financial arrangement that allows individuals to utilise their mutual fund investments as collateral to obtain a loan from a financial institution or lender. This type of loan functions as an overdraft facility, where the bank or NBFC sets a borrowing limit based on the value of the mutual fund units.
However, you can easily opt for a digital loan against mutual funds via smallcase at an interest rate of 10.75%, lower than other traditional loans. The 100% digital process eliminates the need for lengthy paperwork and ensures a quick and seamless application process which can be completed in just 5 minutes on the smallcase app. With smallcase, you can access over 6000+ mutual fund schemes that are registered with CAMS (Computer Age Management Services). Thus, while opting for LAMF, you don’t need to sell/redeem your mutual fund investments and continue earning returns on the pledged units.
How Does a Loan Against Mutual Funds Work?
A loan against mutual funds is a secured financial facility that allows investors to access funds quickly by leveraging their existing mutual fund investments. The process begins by pledging the mutual fund units as collateral with a lender. The lender asks the mutual fund registrar, such as CAMS or Karvy, to mark a lien on the specific quantity of units. The registrar then stamps 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. Since these loans are secured against your mutual fund units, the lender has the right or lien on the mutual fund units. After that, when you pledge your mutual fund units to avail of a loan against them, your funds will still earn interest, but you won’t be able to sell/redeem them before the loan is closed.
It is important to note that you can only withdraw your mutual funds once the loan is repaid. Once the loan is closed, 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.
What is Lien Marking 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, which applies in the case of default.
Are You Thinking of Applying for a Loan Against Mutual Fund? Consider smallcase
If you’re thinking, ‘How to get a loan against mutual funds?’ smallcase is just the right platform for you. At smallcase, you can easily avail of a loan against mutual fund in just 5 minutes on the app. Here is how:
- If you hold mutual fund units in a demat account and have obtained prior permission, smallcase can grant instant loan approval. However, if you don’t have one, simply create a demat account on the smallcase app within minutes.
- After downloading the smallcase app, click on the ‘More’ tab and select ‘Loan Against Mutual Funds’.
- Next, you can import & select the mutual funds you want to use as collateral. Make sure these selected funds are present in the mutual fund list of eligible funds.
- Link your bank account to receive funds and set up a mandate for monthly interest auto-debit.
- Pledge your holdings with the lender. Please note that once your mutual funds units are pledged, they cannot be sold/redeemed before the loan closes.
- At last, sign the digital agreement to complete the LAMF process. Once the verification is completed, money will be credited to your source bank account.
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Who Can Apply for Loan on Mutual Funds?
To avail of an instant digital loan against mutual funds, the primary expectation is to have mutual fund holdings. Apart from that, it is important to know the eligibility criteria and required documents to ensure a smooth and quick application process. Therefore, we have listed the following eligibility criteria and required documents that you need to review before applying for LAMF vai smallcase.
Loan Against Mutual Funds Eligibility
Loans against mutual fund investments are a flexible financing option available to everyone. It caters to a wide range of individuals and entities. Whether you are a resident of India or a self-employed/salaried employee, you can opt for this loan. In terms of age, you need to be between 18 and 70 years old and have an active PAN Card linked to your bank account. One can easily apply for LAMF up to Rs. 5 cr., against approved mutual funds held with CAMS & KFintech. The loan against mutual funds interest rate is determined by the bank/financial institution. However, at smallcase you can avail a loan against MF for 36 months at a competitive interest rate of 10.75% per annum.
If you want a detailed list of who can apply for LAMF, read our article on ‘Who can apply for LAMF?’ to make sure to check all the boxes.
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Documents Required for Loan Against Mutual Funds
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 revolutionised this experience by seamlessly integrating documentation into our digital workflow. You only need your PAN Card and DOB details to complete the application process. Thus, to learn more about eligibility and required documents, read our article on ‘LAMF Eligibility & Documents’.
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 75% of the pledged debt mutual funds. The loan amount depends on the value of the mutual funds you will keep as collateral. However, you can avail digital loan against mutual fund LAMF at smallcase from Rs. 25,000 to Rs. 5,00,00,000.
Factors You Should Consider Before Investing in a Loan Against Mutual Funds
Here are some of the factors that you should consider before investing in a mutual fund loan:
- Be Clear About Your Investment Objectives & Risk Tolerance: Before opting for a digital loan against mutual fund, be clear about your financial goals and risk tolerance. With LAMF, you can fund short-term goals, make big ticket purchases like buying a car, house or even meet financial emergency needs without any hassle via smallcase by keeping your risk tolerance in check.
- Impact on Investment Portfolio and Returns: If you fail to repay the loan, the lender has the right to sell your investments to recoup their losses. So when your investments are liquidated to cover the defaulted loan, you lose control over your asset allocation. As a result, this can disrupt your long-term investment strategy and negatively affect the growth and diversification of your portfolio. Therefore, it is important to carefully consider the implications of using your investments as collateral before taking out a loan.
- Risks Associated with Loan Defaults and Margin Calls: If you cannot repay the loan, the lender may call a margin call. This means they will require you to either add more collateral or sell some of your investments to cover the outstanding balance. Therefore, it is advisable to consult a financial advisor before opting for LAMF.
- 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, and the risks associated with defaulting on the loan. At smallcase, the default loan tenure is 36 months which gives the borrower ample time to repay the loan. Additionally, if one wishes to decide to close the loan early, zero foreclosure charges will be applied. Thus, thoroughly review the lender’s policies regarding collateral maintenance, default procedures, and any prepayment penalties. At sma
What are the Benefits of Investing in Loan Against MFs?
There are several benefits of opting for a digital loan against mutual funds. Some of them are as follows:
- Quick Access to Cash: By pledging your mutual fund units as collateral, you can opt for LAMF. With a predetermined limit based on the fund type, you can get quick access to cash whenever you need it too without selling your fund units. While some lenders may take hours to credit the money, at smallcase, money is credited to your bank account in just 2 working hours once the verification is completed.
- Lower Interest Rates: Compared to the interest rates on credit cards and personal loans, the interest rate on LAMF is typically lower. At smallcase, a loan against mutual fund interest rate is 10.75% p.a which is charged on the outstanding amount. By opting for LAMF, you can save more money on interest payments than other loan alternatives.
- 100% Digital & Paperless Process: Applying for a loan in India is one of the most challenging procedures. But not anymore. When you apply for LAMF via smallcase, the application process will just take 5 minutes. This digital process has helped borrowers to meet their financial needs without selling their investments.
- Flexible Repayment Terms: LAMFs typically have flexible repayment terms. This means you can choose the repayment period that best suits your needs. At smallcase, you can make the repayments at any time before the end of your loan tenure that too with zero foreclosure charges.
Therefore, to learn more about the features and benefits, read our learn article on ‘LAMF Features and Benefits’.
What Can You Use Loan Against Mutual Fund For?
Similar to how you take a loan against gold, house, car, or any other collateral to meet your financial needs, you can opt for a loan against mutual funds online without compromising the long-term investment objectives. You can avail a LAMF due to various reasons, some of which have been listed below:
Financial Emergency
Financial emergencies like unexpected medical expenses, impromptu travel plans, or losing a source of income can hit us anytime. Therefore, when faced with a financial emergency, opting for a loan against your mutual fund investments can be a strategic option compared to redeeming the investments outright. A LAMF allows you to access the required funds quickly while preserving the long-term growth potential of your mutual fund portfolio. This enables you to face situations like these with confidence by keeping your portfolio intact.
Downpayment for High Ticket Loans
Making big-ticket purchases like cars or homes can be financially challenging, even with the help of specific loans. Even if the initial expenditures are covered by the loan, you may end up paying considerable amounts out of your pocket with your day-to-day expenses. In such cases, opting for a digital loan against mutual funds can be a good option. LAMF allows you to get a loan using your mutual fund investments as collateral. This means you don’t have to exit your investments or put them on hold to fund these purchases, simply leverage your mutual funds and opt for a LAMF with lower interest rates.
Alternative to Unsecured Loans
Unlike unsecured loans like personal loans, LAMF is a secured loan where you can pledge your mutual fund investments as collateral to access the required funds without disrupting your long-term investment portfolio. This allows your investments to continue growing through compounding returns, rather than cashing out prematurely. Additionally, the interest rates on LAMFs are generally lower than credit cards or unsecured loans, resulting in significant interest savings over the life of the loan. LAMF lenders also often provide flexible repayment terms that can be tailored to your financial situation, unlike the rigid structures of many other borrowing options. Read our blog on ‘Loan Against Securities or Personal Loan – Which is Better?’ to learn more about how taking a loan against assets or securities is much better than opting for a personal loan.
Dealing with Debt
Dealing with multiple high-interest debts can be a financial burden that can lead to mental exhaustion. In this situation, LAMF is an effective solution for borrowers to consolidate their debts and simplify debt management. Since the interest rate on LAMF is 10.75% per annum which is lower than the unsecured loans, it could also lower the interest rates you’re paying on each individual loan and help you pay off your debts faster.
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 charged when you take out the loan. Therefore, at smallcase, the processing fee is Rs. 999 or 1% of the loan amount, whichever is higher, with a maximum cap of Rs. 4,999 (GST will be applied). For example, Rs. 999 + GST (loan less than 1 lakh), 1% of sanctioned amt + GST (loan between 1 to 5 lakh), and Rs. 4,999 + 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 interest rate on the loan against mutual funds offered by smallcase is 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. However, if you wish to close your loan early at smallcase, then no foreclosure charges will be applied.
How to Close LAMF?
Once you have repaid the principal amount and any interest due for the current month, you have the option to either close the loan entirely or maintain the mutual fund credit limit. If you choose to keep the credit limit, you can withdraw funds again whenever needed, paying interest only on the amount withdrawn. This means you’ll continue to pay zero interest when funds are not being utilised.
However, if you choose to close the loan entirely, you will have the option to get the collateralised mutual funds unpledged, allowing you to redeem or sell these investments if desired. With flexible repayment options combined with the ability to access funds at any time without incurring additional charges, makes LAMF an attractive option.
At smallcase, you can simply request for a loan closure from the help section of your ‘Loan Dashboard’. If there is no outstanding amount, your pledged mutual funds will be released and the loan will be closed. You can also reach out to the support team to help you better.
To Wrap it Up…
To conclude, Loan Against Mutual Funds (LAMF) is a flexible and versatile secured loan that aims to help borrowers achieve their financial goals without compromising on the long-term investment plan. By leveraging the value of their mutual fund holdings, individuals can access much-needed funds all while continuing to benefit from the growth potential of their investments. With 100% digital & paperless process, lower interest rates, flexible repayment terms, and the ability to retain ownership and control over the mutual fund portfolio, opt for LAMF via smallcase to embrace the simplicity of opting loans.
Frequently Asked Questions About LAMF
Loan against mutual funds is a secured loan where you pledge your mutual fund holdings to meet your financial needs. The lender holds these mutual fund units as security till the time the loan amount is repaid. Unlike traditional loans, the interest rate on LAMF is potentially lower which helps the borrowers to save on interest costs.
Yes, you will continue to receive dividends even if you’ve taken an instant loan against your mutual funds. However, you may not be able to sell/redeem them as the pledged mutual fund units act as collateral to the lender. If you wish to sell/redeem those mutual funds then repaying the loan amount is necessary.
A lien on mutual funds is a legal right that allows a lender to take possession. When you opt for 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 fail to repay the loan.
To remove the lien on pledged mutual fund units, the borrower must repay the outstanding loan amount and any accrued interest. The lender then sends a request to the mutual fund registrar to remove the lien, allowing the borrower to freely sell/redeem the units again. The process is typically straightforward upon full loan repayment.
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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