How Do Market Fluctuations Affect Your Loans Against Mutual Funds?
Mar 21, 2025
Stock market fluctuations are inevitable—it's a given. However, these market ups and downs can really shake things up. But what if you've taken a loan against mutual funds? What happens then?
These ups and downs can impact your loan terms, interest rates, and even your credit eligibility. To manage your loan better, it's important to understand these effects. It will also help you avoid costly mistakes. Let’s break it down step by step.
What is a Loan Against Mutual Funds?
A loan against mutual funds lets you borrow money by pledging your mutual fund units as collateral. You don’t need to sell your investments, so they keep growing while you get access to funds. Sounds great, right? But here’s the catch—market fluctuations affect your mutual fund value, which directly impacts your loan terms.
How Does Market Volatility Affect Such Loans?
Market movements play a big role in how your loan works. Here’s what you need to know:
Factor | Explanation |
|---|---|
Fluctuating Collateral Value | Mutual funds are tied to the stock market. If the market crashes, the value of pledged mutual funds drops. Lenders may ask for additional collateral or partial repayment to maintain the loan-to-value (LTV) ratio. SEBI guidelines require lenders to monitor and ensure LTV stays within limits. |
Loan-to-Value (LTV) Ratio Adjustments | LTV ratio represents the percentage of the mutual fund's value a lender offers as a loan (typically 50%-80% per SEBI norms). If the fund value drops, the LTV rises, possibly triggering a margin call—requiring additional funds or securities. |
Higher Interest Costs | Loan against mutual funds generally has lower interest rates than personal loans. However, if the fund value declines, lenders may reassess borrower risk as per Reserve Bank of India (RBI) guidelines, leading to potential interest rate hikes. |
Forced Liquidation of Mutual Funds | If a borrower fails to meet a margin call, the lender can sell pledged mutual fund units to recover losses. SEBI regulations require prior notification before liquidating securities. |
Impact on Loan Renewal | If the mutual fund value drops near the loan term’s end, the lender may hesitate to renew. The borrower may need to repay part of the loan or pledge additional funds. |
Difficulty in Availing Additional Credit | A decline in mutual fund value weakens overall financial standing. This may reduce eligibility for new loans or increase the existing loan amount. |
Tips for Taking a Loan Against Mutual Funds
Planning to take a loan against mutual funds without facing trouble during market swings? Follow these smart tips:
Borrow Less Than the Maximum Limit Just because you can get a higher loan doesn’t mean you should. Keep some buffer to avoid margin calls.
Monitor Market Trends If markets seem volatile, consider a smaller loan or keep extra funds ready to handle potential margin calls.
Choose a Lender with Flexible Terms Not all lenders treat market fluctuations the same way. Platforms like MyFi offer real-time monitoring, alerts, and better terms.
Repay When Possible Don’t stretch the loan longer than needed. Prepay when you can to avoid high-interest costs.
Opt for a Mix of Equity and Debt Mutual Funds If you pledge only equity funds, market dips can hit hard. A mix of debt and equity can reduce risk.
Mistakes to Avoid When Taking Such Loans
Some mistakes can make market fluctuations even riskier. Watch out for these:
Ignoring Margin Calls If a lender asks you to deposit extra funds, don’t ignore it. Failure to act can lead to fund liquidation.
Pledging Highly Volatile Funds Equity mutual funds fluctuate more than debt funds. If you pledge a risky fund, chances of a margin call are higher.
Not Checking Interest Rates Interest rates can change based on risk factors. Always compare lenders before choosing one.
Borrowing Too Much If your loan is close to the upper limit, even a small market dip can trigger repayment demands.
Not Having an Emergency Fund If markets dip and you face a margin call, you’ll need funds quickly. Having a backup can prevent forced liquidation.
Loan Against Mutual Funds Eligibility
Wondering how to get a loan against mutual funds? You must meet these criteria:
You should hold mutual fund units in demat or physical form.
The mutual funds must be from approved schemes.
Your lender will check your credit score and fund value before approval.
Some lenders may have a minimum fund value requirement, so check before applying.
Want an easy way to check your eligibility? Use the Loan Against Mutual Funds Eligibility Calculator on MyFi to find out instantly.
Final Thoughts
A loan on a mutual fund can be a great financial tool. But market fluctuations can change the game if you’re not careful. Keep an eye on your investments, borrow wisely, and choose a guide like MyFi that helps you manage risks better. Ready to explore your options? Check out MyFi today and get started with a smarter loan solution.
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FAQs:
What happens if my mutual fund value falls significantly?
Your lender may issue a margin call. If you don’t act, they may sell your funds to recover the loan.
How do I reduce the risk of margin calls?
Borrow less than the allowed limit, track market trends, and be ready with extra funds if needed.
Can I still earn returns on my pledged mutual funds?
Yes! Your funds remain invested and can still earn returns, dividends, and NAV appreciation.
Is a loan against mutual funds better than a personal loan?
Usually, yes! Interest rates are lower, and you don’t have to sell your investments.
Which mutual funds are best for pledging?
Debt mutual funds are safer, as they fluctuate less. Equity funds can be risky due to market swings.
Can I repay the loan early?
Yes, you can. Prepayment is allowed by most lenders. However, foreclosure fees might apply. Don’t forget to check with the lender.
How to apply for a loan against mutual funds in India?
MyFi can be your partner, guiding you through a quick and seamless approval process.
Charu Dwivedi
Charu Dwivedi is a finance content writer at MyFi, where she breaks down market trends and AI-driven investment strategies, making finance accessible for all investors.
