Loan against Mutual Funds
You may consider borrowing against mutual fund units as a natural alternative, among other options. The advantage here is you don’t have to redeem your units prematurely. This also ensures that your Systematic Investment Plan (SIP) can continue without a hitch. The process is similar to the overdraft facility that bank accounts offer. You can avail loan against equity or hybrid mutual funds by approaching any non-banking financial company (NBFC) or bank. For the bank to consider your loan request, you need to pledge your mutual fund units as security for the debt. The loan will be given based on the value of teams in the folio and the tenure you choose.
How to apply for a loan against mutual funds?
Many online portals sanction loans quickly if you hold units in the Demat form and have prior permission. If you physically own a fund, a loan agreement with the financier/bank should be in place. The lender asks a mutual fund registrar like CAMS or Karvy to mark a lien on the number of pledged units. The registrar then keeps the lien and sends a letter to the lender with a copy to the borrower confirming the lien. It is essential to remember that the lien is marked against the units and not the amount. You cannot redeem the units before you completely repay the loan.
What is the loan amount against the Mutual Fund?
It is important to note that the amount of money that you can get as a loan depends on the type of mutual fund you own. For instance, equity-based funds can fetch you close to 50% of the Net Asset Value of your funds. Some banks also have a maximum and minimum cap on the loan amount you can apply for.
What are the benefits of a loan against a Mutual Fund?
- A loan against mutual funds is an excellent way to receive instant liquidity against the mutual fund units you own.
- If you think your mutual fund investment is lying idle, this is an excellent way to quickly raise capital for short-term financial requirements.
- The interest rates for a loan against mutual funds can be lower than those for personal loan interest rates.
- If you opt for a loan against your mutual fund units, you would not have to sell your units; hence your financial plan and fund ownership remain intact.