Loan against mutual fund is similar to a loan against your insurance policy or shares. During emergencies, you can avail a loan against mutual funds. Loan against mutual funds can be availed from a bank or an NBFC, instead of availing personal loans at high-interest rates.
This facility is similar to a bank overdraft and you can avail loan against mutual funds, when you need cash for a short time period, ranging from three months to a year.
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Loan against mutual funds can be availed from banks or NBFCs, by pledging your mutual funds units. All kinds of mutual funds such as equity, debt and balanced mutual funds can be pledged to borrow a loan. Financial advisors usually recommend taking the loan against equity-oriented mutual funds and not against debt-oriented funds.
Banks and NBFCs usually charge an interest rate of 10-11% for borrowing against MF units. Interest rate usually depends upon the tenure, as well as the loan amount. You cannot switch or sell the mutual fund units when they are under lien.
Lien is a document which gives banks or NBFCs the right of ownership to sell or hold your mutual funds. When you provide a lien in favor of the bank, you are giving the bank, right to ownership of the mutual fund you own.
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If you have prior approval and your units are in demat form, you can avail loan against MFs from an online portal. In case your units are in physical form, you must first execute a loan agreement with your financing company/bank.
The financing company will write to the mutual fund registrar such as CAMS or Karvy, to mark a lien on certain number of units that are being pledged.
When the marking of the lien is confirmed, the financing company lends the money. Financing companies usually lend against 60-70% of the value of the pledged units.
The financing company can enforce the lien, if the investor defaults in making the payments. The financier will send a signed request to the mutual fund house to redeem the units towards loan repayment.
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Once the borrower repays the loan, the financing company can send a request letter to the fund house and ask for a removal of the lien. In case the financier receives part payments, they can request for a partial removal of the lien. In such a case, lien on some mutual fund units will be removed.
Loans against mutual funds are not popular, since many borrowers do not know such a loan exists. The next time you want to avail a loan for an emergency, remember that a loan against your mutual funds, is a better option than a personal loan. Be Wise, Get Rich.
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