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Mutual funds are not only good for investments but also for taking loans. If you have been investing in mutual funds then getting a loan against them in time of need can be easy, that too without drawing on your investment.
An investor can get a loan against mutual fund through an overdraft. Overdraft means getting approval for loan. It can be used in one go or in a systematic way. Interest will be levied on the amount taken as loan from the overdraft.
A personal loan is an unsecured loan. You do not give any security. A house or car loan is a secured loan because you keep mortgage. But when you do not buy any asset and need money for some work, such as for your child’s admission etc then, investing in a mutual fund serves as a guarantee or collateral.

Secured loan
Not let’s see how the interest is calculated on a mutual fund loan. A mutual fund loan is a secured loan. That is why, it is cheaper than personal loan. Major institutions charge interest in the range of 9-13% on such types of loans. If a borrower uses a credit card or takes a personal loan, he may have to pay an interest rate of 14-36%. Plus, once the money is arranged, the overdraft can be repaid. Most banks and finance companies do not charge any fees for prepayment or foreclosure.

Loan depends on portfolio
The amount of loan that one receives against the mutual fund will depend on the portfolio composition and the fund scheme. Most institutions provide loans of up to 50% on equity funds and up to 80% on debt funds.

The unique thing about this loan is that even after loan is sanctioned, the borrower remains the owner of his mutual fund. He will continue to get return on his investment. H, e will also keep getting dividends even if all the units as put as collateral.  However, he will not be able to redeem his mutual fund units before he repays his loan.

The bank will block the pledged securities. Once the loan is repaid, the securities can be sold, if required. Typically, such loans are given for one year and interest has to be paid on regular basis till the loan is extinguished.
One should consider taking a loan on a mutual fund only when there is no other alternative. Such types of loans are not for any specific purpose but only to fulfil personal needs. The amount of the loan should be chosen based on requirements. Also, the bank charges a processing fee. It is based on the amount of the loan. It can be up to one percent of the total loan. The bank will also charge a fee  at the time of renewal.