The majority of Indians secure credit against property, agricultural land, gold, or automobiles as collateral. However, as digitisation progresses, consumers will be able to easily take out loans by leveraging digital assets like mutual funds.
Understanding loans against mutual funds
An overdraft facility, a loan against units of a mutual fund charges interest on the amount borrowed as credit. In this instance, the value of the mutual fund units that will be used as collateral for the loan determines the amount of the loan.
How to Apply:
An investor can apply for a loan against the units he or she owns in a mutual fund at a bank or other financial institution. By contacting any bank or non-banking financial institution (NBFC), the loan can be secured by equity or hybrid mutual funds. It can be carried out offline or online.
The lender does the due diligence, which includes looking into the credit score, figuring out how much each unit is worth, and figuring out if the loan amount is eligible based on these factors.
Loan amount and interest rates
The investor’s loan amount is typically a percentage of the current net asset value (NAV), ranging from 50 to 75 percent, depending on the type of mutual fund they invested in.
The initial terms and conditions agreed upon by the borrower and the bank also determine the interest rate at which the loan must be repaid.
Advantages:
The ease with which technology can be used has changed people’s lives. Shreyans Nahar, Co-Founder and CEO of Finsire, told CNBC-TV18.com that pledging and depleting these digital assets at various touchpoints makes it easier to take out credit than applying for a bank loan or a personal loan with a variety of documentation proofs.
“In the past, people who wanted secured credit had to look for lenders; “As APIs increase scalability, they can avail the credit at various digital platforms they use daily,” Nahar stated. “Now, they can do it at their respective brokers.”
In addition, investors continue to receive dividend payments despite the lien on the units in the event of borrowing against mutual funds. These loans are issued at a lower interest rate because the units of investors’ mutual funds serve as collateral.
Additionally, they can assist in the short-term raising of funds against owned units, which is an excellent facility. Units can be redeemed at any time by investors. Experts assert that this also ensures that the systematic investment plan (SIP) can proceed without incident.
