How a Loan against Mutual Funds can save you money (and time) – Part 1: The What

Most of us at one point or the other have availed of a personal loan. The process typically goes like this. You submit a bunch of personal documents and after a lot of back and forth the bank disburses you a loan at a high rate of interest (typically > 14%). Loan against Mutual funds (LAMF) is a great alternative where you are disbursed a loan instantly by giving your existing mutual fund investments as security.

Did you know you could get loans against not only mutual funds but also your stocks, certain insurance policies, bonds and KVP certificates?

So why should you opt for this type of loan?

For one, most people nowadays have mutual fund investments. This loan option allows you to borrow against your funds while at the same time, continuing the compounding returns from those investments. All gains/losses and dividends from your investments still accrue to you.

LAMF also has lower rate of interest as it is a secured loan and is instantly disbursed online without any need of documentation whatsoever. There are no pre-payment or foreclosure charges freeing you from the hassle of providing post-dated cheques, etc.

Most important of all, LAMF is an overdraft loan which means freedom from inflexible EMI’s!

So what is an overdraft loan?

Instead of the entire loan amount being disbursed at one time, a “credit limit” is set for you. A credit limit means the maximum effective limit upto which you can borrow.

For eg. if a Rs. 5 Lakh credit limit is set for you, that is the maximum net amount you can borrow.

What does this mean for you?

This means that instead of you being charged interest on the entire Rs. 5 lakh, you are only charged on the amount you borrow. Also, if you repay some amount of money back to this loan account, the amount on which interest is charged decreases by that amount.

For eg. You were given a credit limit of Rs. 5 lakh on Day 1. On Day 5, you use Rs. 20,000. On Day 25 you manage to repay Rs. 5,000 from your salary. The actual amount on which you are charged interest is:

Rs. 20,000 (Day 5-25) and Rs. 15,000 (Day 25 onward).

Think of it as a jar from which you can borrow and repay anytime you want, in which the net amount borrowed can never exceed the credit limit. Interest is calculated on daily overnight balance and is debited at the end of each month.

This means that there is no compulsory monthly payment you need to make (like in case of EMI’s) and you can prepay all or part of the loan at anytime you want. Even if you pre-pay you can avail of that amount again subject to the maximum credit limit.

Contrast this to a conventional loan where amount gets disbursed at one ago and whatever you pay back is never again available to you.

Conventional Personal Loan
Digital LAMF (Overdraft Loan)
Higher Rate of Interest (Typically > 14%)
Lower rate of interest (Typically < 11%)
Extensive Documentation and Income Proofs
No Documentation and disbursed instantly
Fixed Tenure and Pre-payment charges
No pre-payment charges and can be withdrawn anytime
Fixed EMI Repayment every month
Flexible Repayment with no fixed monthly amount
Interest charged on net outstanding loan
Interest charged only on net utilised amount

Overdraft loans have traditionally been used by companies and the ultra-rich to manage their cashflow needs smartly while keep interest rates low. Digital LAMF has now bought this option possible to all of us. If used well, this can be a great way to avail of loans quickly, cheaply and ensure repayment terms are flexible. Get your own smart instant loan here.

For more information, read Part 2 of the LAMF Special to know great uses cases for such type of loans.

Leave a Reply