When you need funds but do not want to immediately redeem your mutual fund investments, a loan against mutual funds can be an option to explore. One of the most important factors to understand before applying is the interest rate on mutual fund loan. The rate directly affects the overall cost of borrowing, so comparing the complete loan terms is essential.
The applicable rate can vary depending on the lender, type of mutual fund, loan amount, customer profile, and other lending conditions. For example, current published rates include 10.75%–11.75% p.a. at ICICI Bank and 11.50% p.a. for SBI’s online loan against mutual fund units.
How Does the Interest Rate Work?
A loan against mutual funds is generally a secured borrowing facility because eligible mutual fund units are pledged as collateral. Some lenders provide an overdraft-style facility, meaning interest may be calculated only on the amount actually utilised rather than the entire sanctioned limit.
For example, ICICI Bank states that interest is charged on the utilised amount and for the period it is utilised. HDFC Bank also describes its digital facility as charging interest only on the amount used. This can be useful if you have an approved credit limit but do not need to withdraw the entire amount.
What Determines the Interest Rate on Mutual Fund Loan?
The interest rate on mutual fund loan is not necessarily identical for every borrower. Several factors can influence the rate offered, including:
- Type of mutual fund pledged
- Value of eligible mutual fund holdings
- Loan amount
- Lender’s internal pricing policy
- Customer eligibility
- Repayment and facility structure
- Applicable market-linked or benchmark rates
For instance, Axis Bank currently publishes an effective rate of 11.50% p.a. for its loan-against-securities facilities, while Tata Capital lists rates that can vary based on loan amount and security quality.
Why Comparing Rates Is Important
A small difference in the interest rate can affect the total borrowing cost, especially when the loan remains outstanding for a longer period. However, the interest rate should not be the only factor you compare.
Also check:
Processing Fees
Some lenders charge a processing fee when the loan is sanctioned. These charges can increase the effective cost of borrowing. ICICI Bank, for example, currently lists processing charges of up to 2% of the borrowed amount.
Renewal Charges
If the facility requires periodic renewal, check whether an annual or renewal charge applies.
Penal Charges
Understand the charges that could apply if your account becomes overdue or exceeds the permitted credit limit.
Loan-to-Value Ratio
The amount you can borrow depends on the value and category of your eligible mutual funds. Lenders may apply different limits to equity and debt mutual funds.
Does a Lower Interest Rate Always Mean a Better Loan?
Not necessarily. A loan with a lower advertised rate may still have additional processing, renewal, pledge, or other charges. Therefore, when comparing the interest rate on mutual fund loan, look at the complete cost of the facility. Also consider whether interest is charged on the full sanctioned limit or only on the amount you actually use. Understanding these details can help you make a more informed borrowing decision.
Can the Interest Rate Change?
Some loan facilities have floating or benchmark-linked interest rates, meaning the applicable rate can change according to the lender’s terms. SBI, for example, states that its online loan against mutual fund units carries a floating rate with a one-year reset period. Therefore, borrowers should read the loan agreement carefully and understand whether the rate is fixed or subject to revision.
Fintracworld: Understand Mutual Fund Loan Costs
Fintracworld provides easy-to-understand financial information for people researching borrowing options against mutual fund investments. If you are comparing the interest rate on mutual fund loan, understanding interest calculation, fees, loan-to-value limits, eligibility, and repayment conditions can help you evaluate different options more effectively.
Rather than selecting a loan based only on the headline interest rate, consider the complete cost and whether the repayment obligation fits your financial situation.
Conclusion
The interest rate on mutual fund loan is an important factor when evaluating this borrowing option, but it should be considered alongside processing fees, loan-to-value limits, repayment terms, and other charges. Comparing the complete cost of different facilities can help you choose an option that better matches your financial requirements. Fintracworld can help you understand the key factors involved before taking the next step.
Frequently Asked Questions
Is interest charged on the entire sanctioned amount?
Not always. Some overdraft-style facilities charge interest only on the amount actually utilised. The applicable method depends on the lender and product.
Does the type of mutual fund affect the loan terms?
Yes. Lenders may apply different loan-to-value limits and terms depending on whether the pledged investments are equity, debt, hybrid, or other eligible mutual funds.
What other charges should I check?
Check processing fees, renewal charges, pledge-related charges, penal charges, and any other applicable costs before accepting the loan.
Can I keep my mutual fund investments after taking the loan?
Eligible mutual fund units can generally remain invested while being pledged as security. However, the units remain subject to the lender’s terms until the loan obligations are settled.