Life is unpredictably unpredictable. As a result, you may encounter a temporary cash crunch from time to time for a variety of reasons. It could be due to a home renovation, a family wedding, or a medical emergency, for example. In such cash-strapped situations, the first thought is to use your savings and liquidate your investments, even if it means losing money. If that isn’t enough, you apply for a loan.
If you didn’t know, you can borrow against your mutual fund investments rather than selling them. Yes, just as you can borrow against other assets such as gold and real estate, you can borrow against your mutual fund holdings from banks and NBFCs.
Mutual funds have emerged as a popular investment option for Indian investors in recent years. People are attracted to mutual funds because of their low cost and high diversification potentials. However, many investors are unaware that they can avail loans against their mutual fund investments, providing them with a secure financial solution during a cash crunch. This article aims to explore the concept of loan against mutual funds in India, its benefits, eligibility, and how to avail it, providing Indian investors with a comprehensive guide to optimizing their investment options.
Loan Against Mutual Funds: What Is It?
A loan against mutual funds is a type of secured loan where investors can avail funds against the mutual fund units they hold. In this arrangement, the mutual fund units are pledged as collateral to the lending institution, which offers the loan amount based on the percentage of the fund’s Net Asset Value (NAV). This facility can be availed for multiple purposes, such as personal expenses, business expansions, medical emergencies or even higher education.
Benefits of Loan Against Mutual Funds:
- Quick Access to Funds:
One of the most significant advantages of availing a loan against mutual funds is the quick disbursal of funds, as it typically requires a shorter processing time than other types of loans. This ensures that investors can access liquidity during emergencies without having to liquidate their investments.
- Retaining Investment Benefits:
By pledging the mutual fund units as collateral instead of liquidating them, investors continue to reap the benefits of their investment, such as gains from market movements, dividend income, and compounding.
- Lower Interest Rate:
As the loan is secured against the mutual fund units, lending institutions usually charge a lower interest rate compared to unsecured personal loans. This can help borrowers save on the overall cost of the loan.
- Flexible Repayment Options:
Loans against mutual funds typically offer flexible repayment schedules, enabling borrowers to choose between regular EMIs or a bullet repayment structure, depending on their financial situation and preferences.
- No End-use Restriction:
Unlike sector-specific loans such as home and education loans that require the borrowed amount to be used explicitly for a particular purpose, loans against mutual funds do not impose any end-use restrictions. This allows borrowers to use the funds as per their requirement.
- Overdraft Facility:
Some lending institutions offer an overdraft facility against mutual fund holdings, enabling investors to withdraw funds only as per their requirement and repay the amount as desired, thereby minimizing the interest obligation.
Eligibility Criteria for Loan Against Mutual Funds:
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Like any other loan, lending institutions have specific eligibility criteria for availing loan against mutual funds. Some common conditions include:
1. The borrower must be an Indian citizen and above 18 years of age.
2. The mutual fund units intended to be pledged should be in a dematerialized form or held in a depository account.
3. The borrower must hold lien-marked units, which will be marked in favor of the lending institution.
4. Only specific mutual funds, usually the ones managed by SEBI-registered Asset Management Companies, can be pledged as collateral.
How to Avail Loan Against Mutual Funds?
- Choose the lender:
Several banks and Non-Banking Financial Companies (NBFCs) provide loans against mutual funds in India. Compare their interest rates, loan amount, tenures, and other terms and conditions to select the right lender.
- Approach the lender with required documents:
Reach out to your chosen lender with the necessary documents, including KYC documents, bank statements, and proof of mutual fund holdings.
- Lien-marking of units:
After the lender approves the loan application, lien-marking of the mutual fund units is done in favor of the lending institution. The lien is marked by the mutual fund registrar or the depository participant, depending on the mode of holding.
- Disbursal of loan amount:
Once the lien-marking process is completed, the lender disburses the loan amount as per the agreed terms.
Conclusion:
A loan against mutual funds can be a convenient and cost-effective financial solution for Indian investors during times of emergency. By pledging their mutual fund units as collateral, investors can secure the much-needed funding without liquidating their investments, thus retaining the benefits of their holdings. However, it is crucial to research and compare lenders, understand the terms and conditions, and evaluate the potential risks and benefits before availing of such a loan. In this way, loan against mutual funds can be a powerful tool in an investor’s financial toolkit.