Loans on FDs, MFs, and Insurance for Wealth Growth

In today’s financial realm, taking a loan against an FD, mutual fund, or insurance is already a popular option. This allows the borrower to access the money against these instruments while retaining his or her investments. A loan against an FD, mutual fund, or insurance is a great way to unlock value from three of the most common capital investment tools- the deposit receipt, mutual fund, and insurance policy. In this blog, we will learn the functioning of loans against fixed deposits (FDs), loans against mutual funds, and loans against insurance policies: how they work, their benefits, the costs involved, and how to apply for them-to help you make the correct decision on whether a loan against an FD, mutual fund, or insurance is right for you.

You have already seen the repeated use of the phrase, “loan against FD, mutual fund, insurance” in the introduction above. In the following section, we will dive deep into each type in turn, provide comparisons, and guide you through eligibility and documentation to highlight the best practices in managing such loans effectively.

1. Loan Against FD – Here Is What You Should Know

A loan against a fixed deposit is a type of secured financing wherein one pledges his or her fixed deposit with a bank or any other lender to access part of the value of the said fixed deposit without necessarily breaking or liquidating the deposit. As a fact, you can avail a loan up to 90% of your time deposit value, according to State Bank of India.

Definition and Basic Concept

When you hold a fixed deposit with a bank, you have an asset that generates guaranteed returns. Rather than breaking the fixed deposit-which may incur penalties and a loss of interest-you can ask the bank for a loan by placing a lien on the FD. The FD remains intact, keeps earning interest, and you pay interest on the loan.

For example, the SBI page states “Loan up to 90% of the value of your Time Deposit … Zero processing charges; No pre-payment penalties.”

How it Differs from Personal Loans

• In a personal loan, you borrow unsecured and usually bear higher interest rates, stricter eligibility criteria, and risk to credit status.
• In a loan against an FD, your FD is collateral, reducing the risk to the lender. You may get lower interest with faster sanctioning and minimum documentation.
• Also, in a loan against FD you retain ownership of the FD and continue earning interest, while on a personal loan no collateral is used, or other collaterals are used, and may require full documentation and higher cost.

2. Benefits of Taking Loans Against Mutual Funds

The phrase loan against mutual fund now means a loan against mutual funds, allowing the borrower to pledge his mutual fund units (equity, hybrid, or debt funds) as security for granting loans without redeeming his investment.

For example, HDFC Bank’s “Digital Loan Against Mutual Funds” facility allows minimum loan ₹50,000, up to ₹20 lakh for equity MFs and up to ₹1 crore for debt MFs. Similarly, ICICI Bank offers up to 50% LTV on equity funds and up to 80% on debt funds.

Quick Access to Money Without Liquidation of Investments

With a loan against mutual fund, you don’t have to sell your mutual fund units-you stay invested, continue to earn potential returns, and still access cash. As an example, the SBI loan-against-mutual-fund units scheme lists the key benefit: “You need not sell your MF units to take care of …”

Interest Rates Compared to Other Loan Types

Interest rates are usually lower, as the loan is secured against your investment. In the words of ICICI: “Lower interest rates … since it is backed by your investments, making it less risky for lenders.”

Also, the LTV, or loan-to-value ratio, is higher for debt funds-say 80%-meaning you can borrow more against recourse.

Other benefits

• You retain your investment;
• You pay interest only on the amount utilized-in most cases, an overdraft facility.
• Minimal documentation may be required if the funds are already with the bank or in listed funds.

Overall, a loan against mutual funds can be an efficient way of obtaining liquidity without interrupting your long-term investment plan.

Attention!

3. Insurance-Backed Loans: An Overview

Now shifting to loan against insurance (or more precisely loan against a life insurance policy or ULIP). A loan against insurance means you use the surrender value of your life insurance policy (typically endowment, ULIP or whole life) as collateral to borrow funds. According to Bajaj Finserv, you can get a loan up to 80% of policy value, including against policies in lock-in period.

Explanation of How It Works

• You have a life insurance policy with accrued cash value or surrender value.
• You approach a lender- sometimes the insurer, and pledge the policy as collateral.
• The lender extends a loan limit, usually 50-90% of the surrender value. For instance, PolicyBazaar reports that for an endowment/whole life policy, the amount borrowed can go up to 90%.
• The policy stays active; you maintain coverage; you repay interest (and principal if required) and once done, the lien is removed.

Advantages and Potential Pitfalls

Benefits:

• You avoid the surrender of the policy and any loss of future benefits.
• Faster approval because the policy value acts as security, hence credit checks may be less stringent.
• Low documentation.

Pitfalls to be aware of:

• In case of default, the insurer/lender may recover from the policy value, reducing the death benefit.
• The interest on the loan may be compounded; in policies under lock-in, the interest could be more expensive.
• Not all policies are eligible; for example, term insurance is usually not eligible; you need to check.

4. Eligibility Criteria and Documentation Requirements

Eligibility criteria and documentation vary somewhat for each of the three types: loan against FD, loan against mutual fund, and loan against insurance.

Loan Against FD

Eligibility: You should have a fixed deposit with the bank (same bank or partner) with adequate maturity or remaining term. SBI has the facility of an overdraft/loan against time deposits.

Documentation:  FD account statement, deposit certificate, loan application form.

Loan Against Mutual Funds

Eligibility: Mu­tual fund units held in individual name, account linked, value sufficient to meet the LTV ratio. For instance, for SBI’s loan against MF: “Bank account and MF account should have identical PAN number …”

Documents required: Application form, proof of identity, proof of address, mutual fund statements, lien marking authorization, pledge letter.

Loan on Insurance

Eligibility: The policy should have a surrender value/cash value; the policy can be pledgeable, i.e., endowment/whole life, ULIP, and minimum policy value, ex: Bajaj Finserv lists min ₹25,000

Documents: Policy document, KYC (PAN, Aadhaar), address proof, bank account proof, assignment of policy to lender, income proof (if required)

5. Interest Rates, Fees, and Terms: Understanding the Costs Involved

It is very important to understand the cost structure before taking a loan against FD, mutual fund, and insurance.

Interest Rates

For FD loans: normally the rate of interest is low since it is high quality collateral. Eg. SBI offers “Low interest rates” for overdraft against fixed deposit.

For Mutual Funds: For loans against mutual funds, ICICI quotes interest at ~10.75%-11.75% pa.

For insurance policy loans: Bajaj Finserv lists interest from ~8% p.a. up to ~24% depending on the policy and conditions.

Fees and Charges

Watch out for: processing fees, lien marking fees, renewal charges, pre-payment / foreclosure charges. For instance, ICICI notes processing charges of up to 2% plus renewal charges.

Bajaj Finserv lists prepayment charges up to 4.72% for certain policy loans.

LTV & Loan Period

FD loans: SBI allows overdrafts up to 90 percent of the deposit value.

• Mutual fund loans: LTV depends on fund type-50% for equity and 80% for debt at ICICI.
• Insurance loans: Borrow up to 80-90% of the insurance policy’s value, depending upon the policy type.
• Tenure: Some are demand/overdraft (flexible) loans, others have fixed tenure, and some are annual renewal mutual funds.

6. Calculating Loan Amount and Tenure Options

How Much Can You Borrow?

• Loan against FD: Assuming a fixed deposit of ₹10 lakh, you could borrow up to ~₹9 lakh in favorable conditions, which is 90% LTV.
• Loan against mutual fund: If you hold MF units worth ₹20 lakh and LTV is 50% (equity), you could borrow ~₹10 lakh; if debt fund, could be more, such as 80%.
• Loan against insurance: If your policy surrender value is ₹5 lakh, you might borrow up to ~₹4-4.5 lakh depending on lender/policy type.

Tenure Options

• FD-backed loans often have flexible tenure or overdraft facility till maturity of FD or up to 10 years as per SBI in time-deposit loan.
• Usually, mutual fund loans form an overdraft facility that is renewed annually or for a fixed tenure. The example from ICICI shows digital overdraft for Mutual Fund Loans.
• Insurance loans may allow repayment at maturity of policy or earlier. Interest may be charged monthly or bullet at maturity.

7. Application Process: A Step-by-Step Guide

The following is a simplified application process for each of these types of loans:

Step 1: Choose the correct product, whether loan against FD, mutual fund, or insurance.

Step 2: Check eligibility & LTV with your bank/lender, e.g., amount of deposit, fund value, policy value.

Step 3: Document submission would include the following: KYC, proof of assets-FD certificate, MF holding, policy documents, and income proofs if needed.

Step 4: Pledge & lien marking – For FD: the bank places a lien on the deposit. For MF: pledge units & mark lien through CAMS/KFin. In case of insurance, the policy will be assigned/pledged to the lender.

Step 5: Sanction & disbursement – once lien verified, the loan account opens, generally as an overdraft, and funds get disbursed to your account. For instance, SBI’s MF loan can be sanctioned in < 10 minutes when fully online.

Step 6: Repayment & monitoring – You will need to pay interest and principal as per terms. Monitor your collateral’s value, especially in mutual funds, to maintain LTV.

8. Risks Involved with Loans Against Investments

While these loans offer advantages, there are risks you must understand.

Potential Consequences of Default

• In case of failure to service, the lender can invoke the collateral. For example, this could reduce the death benefit in a policy loan.
• For mutual funds, the pledged fund value going down may ask for a top-up of collateral or lead to a margin call. According to the article on MF loans on Axis Bank, there’s a risk of value drop.
• For FD loan: Although the risk is lower, unserviced interest may decrease the returns of the FD or the bank may break the FD.

Impact on Your Investment Portfolio

• Your FD continues to earn interest—but loan interest may offset returns.
• Your mutual fund units remain in the market, but the risk of reduced value can reduce your borrowing power or maintenance of margin.
• Insurance with a loan will reduce policy benefit if not repaid and may affect long-term financial planning.

Other Considerations

• Interest rate increases or revision clauses may raise your cost.
• You remain liable for repayment irrespective of asset performance.
• Some lenders may charge high processing/renewal fees or have pre-payment charges.

9. How to manage your loan repayment effectively

Here are some smart ways to manage your loan against FD, mutual fund, insurance effectively:

Budgeting Strategies

• Calculate interest cost versus asset return: If your FD is earning say 6% p.a. but loan interest is 8%, you’re net negative-so plan accordingly.
• Set aside cash flows to service interest, treat it like an EMI.
• Avoid drawing full limit if not needed-interest only on utilised amounts helps. Many mutual fund loans let you withdraw only what you need.

When to Consider Refinancing or Pre-payment

• If market conditions fall, the value of mutual funds falls, and the interest cost starts to become higher compared with the asset return; consider early repayment.
• If you earn surplus cash, closing the loan will free the asset and reduce the interest burden.
• Monitor the interest rates-if lender offers better terms elsewhere, you may want to transfer or close.

Maintain Collateral Value

• With regard to mutual fund loans: diversify and monitor the risk; if you rely on this arrangement, avoid volatile funds.
• FD/Insurance: maintain policy valid, keep paying premium, and deposit from credible source.

Documentation & Tracking

• Keep track of lien marking, renewal charges, any floating margin calls.
• Regularly review bank statements, interest debits.
• Make sure you understand terms: prepayment charges, bullet repayment, renewal conditions.

10. FAQs – Loan Against FD / Mutual Funds / Insurance

Q1: Can I borrow 100% of my asset value?

A: Usually not. Lenders apply LTV margin-e.g., 50% for equity MFs, up to 90% for FD. Examples: SBI FD loan up to 90% of deposit.

Q2: Does taking this loan affect my investment returns?

A: Not directly. You keep the asset; returns may continue (MF, FD) but loan interest cost reduces net benefit. For insurance, policy benefits remain (but loan may reduce death benefit if unpaid).

Q3: Am I able to take this loan if my credit score is low?

A: Yes, security, or asset, is more important than credit score often. Less emphasis on credit history for insurance loans.

Q4: Are there any prepayment charges?

A: It depends on lender. Some mutual-fund loans have minimal or no prepayment charges (ICICI notes no prepayment charges for certain LAMF).

Q5: What if the asset value falls?

A: You may need to pledge additional collateral or face margin call / reduction in loan limit. Refer Axis Bank caution about value drop for MF loans.

Conclusion

A loan against FD, mutual fund, and insurance is a pretty intelligent way of unlocking liquidity without liquidating any of your investments. This loan product combines the best of secured-loan financing: lower interest rates, faster processing, and minimal disruption, with the benefits of retaining your asset. Like other financial products, this also calls for consideration of costs, eligibility, documentation, and risks.

Before you proceed:

• Evaluate how much you need to borrow and what you intend to do with the money.
• Compare bank and lender offers – Check the LTVs, interest, fees, and tenure.
• Ensure that you understand the asset you are pledging: FD, mutual fund, or insurance policy.
• Have a clear repayment and exit strategy so that you don’t jeopardize your investment or coverage.

If you plan carefully, a loan against FD, mutual fund, or insurance can give you the flexibility to meet cash needs without losing your core assets or disrupting investment goals. Try finding out more about this from your bank or lender today.