What are loan against mutual fund?

Loan against securities is a loan where you pledge your shares held in demat account, mutual funds or life insurance policies as collateral to the bank against the loan amount. The securities are pledged with the bank till such time the loan is repaid by you.

How do loans against securities work?

Loan against Securities are typically offered as an overdraft facility in your bank account after you have pledged your securities (shares / mutual funds or life Insurance policies, etc.). You can draw money from the overdraft account whenever required and pay interest only on the loan amount that you have used for the particular period.

Let us understand through an example - You got a loan of Rs 5 Lakhs against your securities and you drew Rs 2 Lakhs for expenses. After 2 months, you deposited back the amount in your bank account. Thus, in this case, you are liable to pay interest only for 2 months on Rs 2 Lakhs (even though the loan sanctioned amount is Rs 5 Lakhs) at the interest rate charged by the bank on the overdraft facility.

The loan eligibility amount depends on the total value of the securities offer by you as a collateral. The total loan amount given by the lending institute or your bank is typically 60-70% of the total security amount.