You get to office and rush to start your work. This is when your mobile rings. You pick it up and find an executive from a reputed bank asking you to avail a personal loan. You get several calls from executives of different banks throughout the day, asking you to avail personal loans.
You are in a dilemma....You want a loan very badly and are tempted to avail a personal loan. But, a personal loan charges a very high interest. Are there any alternatives? This is when a friend recommends you avail a loan against your mutual fund units. You are tempted to do so but, you don't know much about loan against mutual funds. Well, it's time to read this article.
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You can avail a loan against equity mutual funds, hybrid mutual funds or even debt mutual funds. Many financial planners advise against availing a loan against debt mutual funds.
You simply approach a bank or an NBFC and request a loan against your mutual fund units. The bank then writes to the mutual fund registrar like CAMS or Karvy and asks them to mark a lien on the units of the mutual fund, you have pledged to the bank. Lien is a document which gives the bank the right to hold or sell your mutual fund units.
The mutual fund registrar then marks the lien and sends a letter to the bank confirming the marking of the lien on the mutual fund units. You are also send a copy of this letter. You get the loan against your mutual fund units depending on the value of the mutual fund units held on the folio of your mutual fund account.
If you need money in a hurry for a short tenure like 3 months to a year, loan against mutual funds is your easy loan.
You can get a loan of around 50% of the value of your mutual fund units. The interest rate charged by the bank could be around 10 - 11% and depends on the quantum of loan availed, your credit score and the tenure of this loan. This is much lesser than the interest charged on a personal loan. Banks have a list of mutual fund schemes against which they are willing to lend.
You don't have to sell your mutual fund units. You simply pledge these units to the bank and borrow against them. Any dividends you get from the mutual funds are yours to enjoy. You cannot redeem the pledged mutual fund units, until the loan has been repaid.
If your mutual fund investments are lying idle and you need money in a hurry for the short term, do consider a loan against mutual funds.
You might have invested your hard earned money in mutual funds to attain financial goals. You might want to buy your dream car within 2 years or take your wife on a holiday to France.These financial goals could be destroyed, if you need a loan in a hurry. You would be forced to sell your mutual fund units at a loss if the stock markets are falling, as money is needed immediately.
With a loan against mutual funds, you don't need to sell the mutual fund units. You simply pledge them with a bank and remain the owner of these mutual fund units. After you repay the loan, the bank sends a request letter to the mutual fund house, asking for the lien to be lifted. You are now the rightful owner of your mutual fund units.
Don't you think your financial goals remain intact if you avail a loan against mutual funds?
Yes, loan against mutual funds are an easy loan...but, you need to be careful not to default on this loan. If you default on this loan, the bank will request the mutual fund house to redeem the units to repay the loan. So do make your repayments in time. Be Wise, Get Rich.
Mr C.S.Sudheer is a management graduate. He started his career with ICICI Prudential Life Insurance and later on worked with Howden India. After his brief stint in Howden India, he moved on and incorporated Suvision Holdings Pvt Ltd which is the sole promoter of IndianMoney.com. He aims to build a nation that is financially literate with investment savvy citizens.