A loan on mutual funds is a preferable option to liquidate your mutual fund investments. You may quickly raise money and boost the value of your investments by doing so.
The loan satisfies your urgent financial demands while preserving your mutual fund portfolio and allowing it to continue to generate earnings.
Here are Certain Things to Know about Loans Against Mutual Funds
You can obtain a loan against your interests in mutual funds instead of selling them.
You can obtain a loan from banks and non-banking financial institutions using your mutual fund holdings just as you can use other assets, like gold or real estate, as collateral.
1 – You can get a Loan only up to a Limit of Your Mutual Fund Holdings
The type of mutual fund schemes you invested in and the financial institution from which you will borrow will significantly impact the amount of loan you may obtain against your mutual fund units or assets.
2 – Not all Banks give Loans Against All Mutual Funds
You can avail loan amounts from banks if you only opt for specific mutual fund schemes.
3 – There is an Upper Limit on the Loan Amount you can get
Loans against mutual funds are subject to specific restrictions, similar to any other type of loan. Banks frequently set maximum and minimum loan amounts.
4 – Loans against Mutual Funds Cost Less Than Personal Loans And Credit Card Loans
A major advantage of a loan on or against mutual funds is the lower interest rate than personal or credit card loans. This is so because loans secured by mutual fund schemes are guaranteed by collateral.
5 – You Continue To Earn Returns On Your Pledged Mutual Fund Units
Such units remain invested in the market when you put them up as collateral for a loan. This is because when you pledge such investment units to a bank, you give the bank with the right to sell the units solely in the event of a default.
However, as long as you don’t default, your assets are still tied to the market, and you can still get profits.
6 – You Can Apply Online And Get An Overdraft Limit Set In Your Bank Account
Thanks to technology, many banks now offer online loans secured by your mutual fund investments. You must pledge your mutual fund units online to create an overdraft limit in your account.
An overdraft facility is a credit arrangement between you and your bank that permits you to withdraw more money than is already in your account. It has an established cap.
What are the Advantages of Taking a Loan Against Mutual Funds?
The advantages of taking a loan against mutual funds have been highlighted below:
Interest Rates for Loans Against Funds
A loan secured by mutual funds has a lower interest rate than a personal loan. It is because it happens to be a secured loan.
Lien for Mutual Funds
Investors don’t need to redeem mutual funds to acquire loans against them. The units act as security for loans.
It plays a pivotal role in cases when there is a requirement for quick cash. If you are in financial turmoil, you can pledge fund units online and acquire money into your account.
A Source of Short-Term Capital Needs
Loans on mutual funds are necessary when money is required for the short term. You have the option of raising cash for a short period using investment fund units.
Pay Interest for the Used Loan Amount
The good thing is that one pays interest on the amount of the loan used rather than the full amount promised.
How does a Loan Against Mutual Funds Work?
With a loan against securities, your mutual fund units serve as the security for the loan. Such units will be held as security by the bank until the loan is paid in full (debt mutual funds).
Although you won’t be able to sell your mutual funds while they are committed to the bank, they will continue to collect interest.
You cannot withdraw the mutual funds until the loan is paid back. However, you will still get dividends on these fund units. The financier may petition the fund house to remove the lien when the loan is repaid. You can also execute a partial discharge of the lien.
The bank may strengthen the lien if the borrower doesn’t repay the loan by the deadline. This is applicable in the event of repayment default. In this instance, the lender gives the mutual fund instructions to redeem the units and issue the lender a check.
Why Loan Against Mutual Funds is a Convenient Option for Investors?
Most of us had probably experienced a situation when we urgently needed money to cover an unanticipated or unaccounted-for expenditure. Redeeming our investments in such circumstances is the first thing that comes to mind.
The next choice is personal loans, credit cards, or cutting-edge goods like buy-now, pay-later loans (BNPL). All of these loans are unsecured ones.
However, you may also take out a loan against your mutual funds instead of redeeming them if you want to obtain credit at a rate that is significantly lower or if you don’t want to sell your mutual funds.
How to Apply for Loan Against Mutual Funds?
The banking or lending institution (NBFC) would want you to put up your mutual fund units as collateral. Both physical and Demat forms of mutual fund units are acceptable. The units must be pledged with the depositories, such as NSDL or CDSL if they are in Demat form.
If your units are physically present, the bank or NBFC will approach the Registrar and Transfer Agency (RTA), such as CAMS or Karvy, to record a lien on the units pledged to the bank or NBFC.
Please be advised that once your mutual units are committed (on lien) to the bank or NBFC, you cannot redeem your units until you have closed the loan. However, you continue to hold mutual fund units use of all the advantages that come with them.
Can I get loan against mutual funds from any bank?
The majority of banks and NBFCs provide loans secured by mutual funds. To find out if your NBFC branch offers loans against mutual funds, get in touch with the loans department, browse their websites, or call.
What is the rate of interest on loan against mutual funds?
According to the bank’s current marginal cost of funds-based lending rates (MCLR) and the spread over MCLR, the rate of interest on loans secured by mutual funds would vary. The current rate environment will determine MCLR. To learn the interest rate they impose on such loans, check with the local branch of your bank or an NBFC.
Can I loan against any of my mutual fund schemes?
The interest rate on loans secured by mutual funds would fluctuate based on the bank’s existing MCLR and the spread over MCLR. The MCLR will be based on the present rates.
Consult the local branch of your bank or an NBFC to understand the interest rate they charge for such loans.
Can I apply for loan against mutual funds online?
Many banks and NBFCs provide online borrowing options. You must go to their website, enter your PAN and Aadhar information, and then adhere to the bank’s or NBFC’s online loan application instructions.