ICICI Bank has launched an instant loan against mutual funds facility. So, if you are an existing ICICI Bank customer and have made mutual fund investments, you can apply for an instant loan against your MF investments. The loan is available in the form of an Overdraft facility (and not a term loan). You pay interest on the utilized amount and need to renew the facility every year.
By the way, this instant loan against MF investments product is not new. I wrote about a similar instant loan facility from HDFC Bank a couple of years back. Let us find out about ICICI Bank Insta Loan against MF facility in detail.
ICICI Bank Insta Loan Against Mutual Funds: Important Features
- Overdraft facility (and not a term loan). Interest to be paid only on the utilized amount.
- The facility needs to be renewed every year.
- The loan facility is available only for residents. NRIs cannot apply for this facility.
- The overdraft facility is offered in tie-up with CAMS. Therefore, only funds from those MF houses that are serviced by CAMS will be eligible for loan. Prominent CAMS-serviced AMCs are HDFC MF, ICICI Prudential MF, SBI MF, ABSL MF and Kotak MF. For the complete list of mutual fund houses (AMCs) serviced by CAMs, visit CAMS website.
- Funds from AMCs not serviced by CAMS such as Mirae, Reliance, UTI and Franklin will not be eligible.
- Minimum Loan Amount: Rs 50,000
- Maximum Loan Amount: Rs 20 lacs against equity mutual fund investments, Rs 1 crore against debt mutual fund investments
- The bank will mark a lien on the MF units pledged as collateral. You will not be able to sell the pledged units until you close the overdraft facility.
How Much Loan Can I Get?
As mentioned above, the loan amount depends on the type of mutual funds you are offering for collateral.
- With equity funds, you can get a loan (overdraft) facility up to 50% of the portfolio value. Note that this limit of 50% is imposed by the Reserve Bank of India.
- With debt funds, you can get a loan (overdraft) facility up to 90% of the portfolio value.
Note that the value of the MF portfolio shall keep changing. If the portfolio value drops, your drawing power can be reduced. If your current borrowing exceeds the drawing power, you may be asked to furnish the additional units for security or pay penal interest. I am not sure how this works in this ICICI Bank facility or what is the frequency for resetting drawing power. You must check this with the bank.
What Is the Rate of Interest for ICICI Bank Insta Loan against Mutual Funds?
The rate of interest shall be 9.90% p.a. for loan against equity mutual funds and 9.4% p.a. for loan against debt mutual funds. Note this is the current rate of interest and is applicable for just the first year. At the time of renewal, the bank can change the rate of interest. It is not clear what will be the rate of interest charged if you want to take loan against a portfolio that has a mix of both equity and debt mutual funds. Processing fee is Rs 500. Renewal fee shall be Rs 2,500. GST shall be applicable on such fees.
How to Apply for Insta Loan against Mutual Funds Facility?
- You need to log in to ICICI Bank Net Banking website.
- Go to Investment and Insurance section.
- Click on Insta Loan against Mutual Funds
- You will be taken to CAMS website. You can log into your CAMS account. If you do not have a CAMS account, you can create one. After logging in, you will find all your MF investments (serviced by CAMS). Select the funds you want to offer as security.
- Accept terms and conditions.
- You will get an OTP. You need to enter on the CAMS website.
- Your Overdraft account will be instantly opened, and the limit will be set accordingly.
For more details, refer to the FAQs for this facility on ICICI Bank website.
Is There a Merit in Such a Facility?
After all, you can sell your MF investments and use the amount for your requirement. What is the point in taking a loan against it? Moreover, the returns from your MF investments are not guaranteed but you must pay the interest on your loans. If you are taking a loan against a debt mutual fund, your debt mutual funds will not likely offer returns more than 4-7% p.a. (these days), the loan will cost you over 9% p.a.
Well, there is a counter argument too. This facility is an overdraft facility. You pay interest only on the utilized amount (and not the sanctioned limit). If you do not draw any amount over the year, you pay nothing, except for the processing fee and the renewal fee. If you were to break your investment to fund your requirement, the resulting sale may lead to capital gains, which will then be subject to capital gains tax.
As a borrower and investor, you need to weigh in the impact of capital gains tax against the interest cost and the various charges in an OD facility. Irrespective, an OD facility offers flexibility that many borrowers will prefer. Sometimes, you sell an investment for something urgent, but that money never goes back in. You forget about it. With Overdraft, you will remember to pay the interest and your investments remain intact. This CapitalMind post and podcast covers this aspect in a detailed manner.
What would you do?