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Loan against Mutual Funds
A small or large financial crisis can occur at any time. Investors often need money on short notice. Even though not all mutual funds offer high liquidity, you can use them as collateral for bank loans. This article deals in-depth with loans against mutual funds.
Loan against Mutual Funds
You might consider borrowing against mutual fund units as an easy alternative, among other options. The advantage here is that you don't need to prematurely redeem your units. This also ensures that without a hitch, your Systematic Investment Plan (SIP) can continue.
The process is similar to the service provided by the bank accounts for an overdraft. Through approaching any non-bank financial company (NBFC) or bank, you can make use of loans against equity or hybrid mutual funds. You need to pledge the mutual fund units as collateral for the debt for the bank to accept your loan application. The loan will be issued depending on the folio unit value and the period you pick.
Interest Rate of Loan against Mutual Funds
You can repay the loan on the mutual fund units at an interest rate of 10% to 11%. This will, of course, be subject to the terms and conditions laid down by the duration of the loan and the lender. Because it is a secured loan, the rate of interest will be lower than that of an unsecured loan. Also, if your credit score is good or you've been a long-standing bank customer, then a lower interest rate could be agreed by the bank manager.
Lien for Loan against Mutual Funds
Before we continue the process of using this loan, understanding the lien on mutual funds is essential. Lien is a document that entitles the bank to sell or hold the fund. Therefore, when you sign a statement on behalf of the bank, you assign the rights of the fund units that you own to the bank.
Then you have to contact the fund house and ask in the bank's name for a lien on your property. The application letter for lien change must be signed by all unit owners.
Availability of Loan against Mutual Funds
Remember that the amount of money you can get depends on the type of mutual fund you own. For example, equity-based funds can collect nearly 50 percent of your fund's net asset value. Often, many banks have a maximum and minimum limit on the amount of loan you can apply for.
In Loan against Mutual Funds from Karvy, the minimum loan amount that you can avail is Rs. 50,000 for which you need to have a minimum portfolio value of Rs. 1 lakh.
Advantages of Loan against MF units
- Loaning against mutual funds is a great way to get instant liquidity against your owned units of mutual funds.
- If you think your investment in the mutual fund is idle, this is a great way to quickly raise capital for short-term financial needs.
- Interest rates for a mutual fund loan may be lower than those for the interest rate on personal loans.
- When you apply for a loan against MF units, you won't have to sell your shares, thus your financial plan and the ownership of the fund remains intact.
Things to know before applying for Loan against Mutual Funds
- Loans are only given against mutual funds approved by the bank that you choose.
- The loan facility is available for both debt and equity funds, but confirm if your mutual fund is approved by the bank for a loan.
- While most banks offer loan facilities against mutual funds, according to RBI, such a loan can only be provided by NBFCs worth more than Rs. 100 crores.
- During the lien, the units of the mutual fund are non-redeemable, but you can still get dividends.
Loans against mutual funds are very rare because of a lack of awareness and data on the matter. So when you think about alternative ways to raise a contingency fund next time you remember that a loan against your mutual funds may be a better option than traditional instruments.