Loan against mutual funds: Typically, mutual funds are investments for the medium to long term. However, investors do not have to sell their investments in order to obtain loans against mutual funds in an emergency.
However, investors should be aware that taking out a loan against their investment could hold them back from achieving their financial objective. Depending on the stock basket, the returns can be very appealing if the investment is left alone.
The fact that the interest rate on a mutual fund loan is significantly lower than that of a personal loan or credit card is one of the biggest advantages. Additionally, equity fund units have comparatively higher interest rates than debt fund schemes.
Before applying for a loan against mutual funds, consider the following:
Eligibility
The majority of banks and non-banking financial institutions (NBFCs) offer loans against mutual fund investments to investors, businesses, trusts, companies, and other entities. Minors are not subject to the rule. The minimum age for individual investors to apply for these loans is 21.
The applicant’s or company’s credit score and consistent income are additional eligibility requirements. The applicant may be able to negotiate a lower interest rate with a higher credit score. The bank or financing institution sets the loan amount, duration, and interest rate.
Secured or unsecured
Loans against mutual funds can be secured or unsecured in one of two ways: unprotected and protected. A loan that is backed by collateral, like your investments in mutual funds, is known as a secured loan. Although you may be required to pledge a larger portion of your mutual funds as collateral, secured loans typically have lower interest rates.
An unstable credit isn’t supported by any guarantee. Similar to credit card loans and personal loans, these loans are not secured by the borrower’s financial assets. As a result, banks charge more for interest.
Things to keep in mind
Loan terms
Investors who want to borrow against mutual funds should carefully read the bank’s loan terms. The payback amount should be calculated after they have looked at the interest rate, loan duration, and other costs. They can also choose the best deal by comparing offers from other schemes.
Documents Required
When applying for a loan against mutual funds, investors are required to submit documents demonstrating ownership of mutual fund investments, income, and identity. A copy of the investor’s bank statement, PAN card, or other financial documents may also be requested by the banks.
Pledge your mutual funds
Investors must pledge their mutual funds to the lender as collateral. As a result, the lender will hold a lien on your mutual funds until the loan is paid back.
Loan repayment:
Investors should carefully compare the loan’s repayment terms to those of the mutual funds. If investors repay a portion of the loan, that portion of mutual fund units may be released from the lien in some instances. Even if an investor has borrowed against an MF investment, it can still pay dividends.
Inability to reimburse the credit on time might bring about the bank offering your mutual fund speculations to recuperate the loan amount.
