As mutual fund units are emerging as the new collateral for pledging beyond conventional gold and real estate, The Perfect Voice spoke with Krishna Kanhaiya, Director and CEO, Mirae Asset Financial Services – a NBFC that lends against mutual fund units and securities to gather more insights on the subject. Excerpts…
It has been over two years since you launched loan against mutual funds. How has been the journey of your loan book so far in terms of the type of retail investors?
Launched in July 2022, our loan book has doubled from December 2023 till date after having surged from January to December 2023. With our digital first approach, we have seen borrowers in the age group of 30-50 years for their needs including marriage, home renovations, children’s education, and travel.
What is the market size of loan against mutual funds in India and how seamlessly can an individual complete the process?
Unfortunately, there isn’t a published report that specifically outlines the market size for loans against mutual funds. This type of loan is typically categorized under the broader umbrella of loans against securities, which also includes loans against shares, insurance policies, gold, property, and other assets.
However, we believe that the potential market size for loans against mutual funds is significant. This belief is rooted in the current scale of individual investors’ Assets Under Management (AUM), which, as of July 2024, stands at an impressive Rs 39.50 lakh crore.
Compare to gold loan or loan against property, how convenient and cost effective it is, in terms of interest rate, to borrow against MF units
Some of the challenges with a loan against properties include valuation of the property, depending on the condition of the property and the time-consuming and tedious process along with high processing fees and other charges. Moreover, the borrower has to submit income documents to prove his or her repayment capability, even if it is a secured loan and interest rate may differ on credit score of the borrower, age, type of property and repayment capability among others.
In case of availing gold loans, interest rate is higher compared to loan against mutual funds and the process is physical as the borrower has to visit the branch or the relationship manager has to collect gold from the applicant’s place. Valuation of gold is based on gold purity and yellow metal below 18K is not accepted and the entire value of ornament is not considered.
What are the risks including margin call that an individual should bear in mind while borrowing against MF units? Any of your experience of default so far.
If the market falls, your eligible loan limit is revised as per the current market value of the pledged mutual funds on a daily basis. Where the borrower’s utilized amount is higher than his or her revised eligible limit, you receive a margin call to regularize your loan account within the stipulated timeline either by depositing additional funds or by pledging additional mutual fund units as collateral.
We recommend our clients to not utilise 100% of the loan limit and to maintain a buffer to avoid such margin calls. Pledged mutual funds may be invoked if the borrower fails to regularize the account or repay your over-dues within the stipulated time period. Till the units are pledged, redemption will not be possible. Loans against mutual fund are not ideal for long term expenses and against short term investments and they should not be used for speculative purposes in the capital market.
Are all mutual fund units eligible to be pledged for borrowing or are there any restrictions?
Not all mutual fund units are eligible for pledging to borrow against them. Close-ended mutual fund schemes are not eligible for pledging as they cannot be invoked in case of default. Hence, only open-ended schemes can be pledged to avail loan against mutual funds. Tax saving schemes (ELSS) outside of the lock-in period can be pledged to avail the overdraft facility.
Is the borrower entitled to receive benefits like dividend and other benefits if any, from the pledged units during the period?
Yes, the borrower is entitled to receive benefits such as dividends and other related benefits from the pledged units during the period of the loan. When a borrower pledges their mutual fund units as collateral for a loan, they retain full ownership of those units. This means that, even though the units are pledged, the borrower continues to be the legal owner and thus is entitled to all the benefits that come with ownership.
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