I had written a post on loan against securities earlier. However, the process always seemed a bit drawn out. It can easily take up to 5-6 days to avail the facility. HDFC Bank has come out with a loan facility — Digital Loans against Mutual Funds or Digital LAMF — where you can pledge your mutual fund assets online and get an Overdraft facility enabled within 3 minutes (or so the bank claims). Let’s find out more about this loan product.
Who Can Avail This Facility?
- You must be a resident Indian.
- You must have a bank account with HDFC Bank.
- You can apply for the loan online through net banking. Therefore, you must have net banking enabled for your account.
- You must have mutual fund investments.
- Only those mutual fund investments are eligible for loan that are serviced by CAMS. Your investments with other RTAs (Registrar and Transfer Agents) won’t be considered for you.
- Only the Mutual Fund holdings under Individual holding pattern are eligible for the loan facility. You can not avail the loan facility for mutual fund investments under Joint mode.
What is CAMS?
CAMS (Computer Age Management Services Pvt. Ltd.) works as Registrar and Transfer Agent for many mutual fund houses (or AMCs) in India. CAMS provides infrastructure and back office services to many AMCS in India. You can visit CAMS website to find out more. The key part is that CAMS has all the information about your mutual fund investments for the AMCs that it provides services to. Therefore, CAMS plays a very critical role in this loan facility. Based on your request, CAMS creates a pledge on select MF investments. Thereafter, HDFC Bank can offer you the loan. Please understand the entire process could have happened offline too. However, in such a case, loan disbursal would have taken a few days at the least. HDFC Bank, in partnership with CAMS, has cut short the entire process by digitising the entire process, effectively reducing the turnaround time to a few minutes.
List of Asset Management Companies (AMCs) Serviced by CAMS
- Aditya Birla Sun Life Mutual Fund
- DSP Blackrock MF
- HDFC Mutual Fund
- HSBC Mutual Fund
- ICICI Prudential Mutual Fund
- IDFC Mutual Fund
- IIFL Mutual Fund
- Kotak Mutual Fund
- L&T Mutual Fund
- Mahindra Mutual Fund
- PPFAS Mutual Fund
- SBI Mutual Fund
- Shriram Mutual Fund
- TATA Mutual Fund
- Union Mutual Fund
For the investments that you have made in funds from one of the aforementioned posts, you can avail loan through HDFC Net Banking portal. According to information available online, only the MF investments with 10 AMCs (serviced by CAMS) are eligible for this loan facility. As you can see, I have listed 15 AMCs above. I am not very sure which 10 AMCs are permitted. As I understand, the largest ones including ICICI, HDFC, Aditya Birla Sun Life, SBI MF etc are approved for the facility. By the way, once you log into myCAMS website through HDFC Bank net banking site, you will be automatically shown the list of schemes that are eligible for the overdraft facility.
How Do I Apply for the Loan?
As mentioned, you must have an HDFC bank account and net banking should be enabled for the account.
- Once you log in, you will be required to log in to your CAMS account (myCAMS) via Net Banking. If you haven’t created myCAMS account already, you can create it here.
- Select mutual funds to pledge from your portfolio. You will be able to view investments with only those AMCs that are serviced by CAMS.
- Enter One-Time Password (registered with CAMS) to activate the facility.
You can watch the video about the application process on Youtube.
Points to Note
- You can get loan against both equity and debt funds.
- Even the first time borrowers or those without credit history can avail this facility.
- Since this is an overdraft facility, interest will be applicable on the utilized amount.
- The facility is available to HDFC Bank account holders across the country.
- New loans and enhancements are permitted online.
- You will not be able to sell the MF investments that you have pledged to avail the overdraft facility.
- Once you close the overdraft facility, you can get the pledge removed. Subsequently, you can sell these mutual fund units.
How Much Loan Can I Get?
Clearly, you will get the loan for only a certain percentage of the value of your existing assets (and not for the market value of the investment). The Reserve Bank of India has capped the loan amount against equity mutual funds (or shares) at 50% of the market value. There is no cap specified for debt funds. The advance against debt fund units depends on the bank policy. However, you can expect the Loan-to-value (LTV) to be higher for debt funds investments (as compared to equity fund investments).
What Is the Rate of Interest?
The benchmark MCLR for the loan is 1-year MCLR. Currently, the loan is being offered at 1-year MCLR + 2.3% p.a. For more on rates and fees, visit this page.
What if the Value of My Investment Falls Down?
This past is a bit tricky. It is quite possible that the value of your assets may drop after you have availed the facility. In such a case, the drawing power (under your Overdraft Facility) will be adjusted downwards. If you have withdrawn greater than the drawing power (reduced), you may be asked to furnish additional MF units for pledge. If you cannot, you may have to pay penal interest on the excess amount (or even on the entire withdrawn amount). For more on this facility, you can visit Loan against Securities page on HDFC website.
What Should You Do?
The return you earn on your MF investments is not guaranteed. However, you have to pay interest on the loan (overdraft). And 10-12% p.a. interest is not a low cost. It is quite unlikely that you will get 10-12% on your debt fund investments. You can get such (or perhaps better) returns on equity funds investments but there is a possibility of a loss too. Paying 11% on a loan against an asset that has gone down 5% over the last year is never a good sight.
You have to make a choice.
- Sell the MF units and the use the proceeds for your requirement.
- Take a loan against the MF units.
Be rational. Don’t get emotionally attached with your investments. I understand, sometimes, exit penalties/restrictions or tax considerations may prevent you from selling the units (and you may want to take out a loan against those assets). However, don’t ignore the basic math. I would go with Option 1. What will you do?