Digital loans against MFs are fast, but here's what you should know

Do not max out the LTV ratio, do not use it for long-term funding, and keep a watch on market volatility

- Jash Kriplani

You may have heard of loans against mutual funds. Now, fintech platforms are stepping in to make them popular—offering quick, paperless access through fully digital channels—where you can get the loan amount in your bank account in minutes.

That said, loans against MFs carry risks. Because what you pledge as collateral is a volatile asset class—equity funds, particularly, can go through volatile phases during market turbulence. If you fail to maintain the required margin, you may be forced to part with your investments.

We look at how fintech platforms enable quick access to loans against mutual funds and why you should be cautious when availing them.

Quick accessSo, if you have a fintech app that offers loan options such as a loan against mutual funds, all you will need to do is submit your PAN number on the platform's app. The app automatically fetches the borrower's fund holdings linked to that PAN. Based on the platform's loan-to-value (LTV) ratio and its list of eligible schemes, the credit limit is calculated. The borrower can then choose to either go with the same credit limit or set a lower limit.

Most platforms have a minimum loan amount, often in the range of 10,000-25,000, while the upper cap can run into a few crores depending on the borrower's portfolio size. The LTV ratio tells you how much you can borrow for each type of loan.

The borrower can also adjust the credit limit at the scheme level by selecting how many units of a particular scheme to pledge. The credit limit acts as an overdraft facility; you are charged interest on the amount you withdraw from this facility. Debt mutual funds offer a higher LTV ratio. You cannot sell the pledged mutual funds until you fully repay the loan.

The next step is to link your bank account. This account will receive the loan amount and be used to set up an auto-debit mandate for monthly interest payments. The mandate becomes active after loan disbursal.