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Loan Against Mutual Funds

IndianMoney.com Research Team | Updated On Monday, September 10,2018, 12:41 PM

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Loan Against Mutual Funds

 

 

 

In times of financial emergencies, the natural instinct of people is to realize or sell securities/assets. But is it wise? Saving money is quite a task in an economy with an increasing consumer-level real inflation. Let’s say you have invested in mutual funds. The likely intention of investing in mutual funds is to earn decent post-tax returns which beat inflation.

What if you need money for the short term, say for 3 months to a year? Consider this,

1. You can avail a personal loan which charges interest as high as 13-21% a year.

2 You can redeem mutual funds units or sell your assets.

3. You can stop SIPs and axe your investment routine.

Is this wise? Why not consider borrowing against your mutual fund units? Pledge your mutual fund units as security/collateral with banks and avail loans against them.

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How can you avail a loan against mutual funds?

You are an investor in mutual funds. This is something really great for you. You can avail a loan against your investment in mutual funds. All you have to do is approach a bank or an NBFC, and request for a loan against your mutual fund investments. The bank would consider your request only after seeking a lien (This is the legal right of the bank to sell the units of your mutual fund, in case you default on your loan). The lien gives the bank the right to sell your mutual fund units which you have pledged, if you default on your loan. The bank holds the right over the units of your mutual fund investments, till the time you have repaid your loan. The bank will sanction your loan, depending on the value of mutual fund units, which are held in the folio of your mutual fund scheme.

What happens once you repay your loan? Simple…the bank would lift the lien on the units of the mutual fund investments, you had pledged. You are once again the rightful owner and are free to sell your mutual fund units, if you so desire.

See Also: Money Market Mutual Fund

What quantity of loan is sanctioned against your mutual fund investments?

The quantity of loan sanctioned, depends on the type of mutual fund. If you pledge equity mutual funds, you will be able to avail a loan which is as high as 50% of the NAV (Net Asset Value) of the fund, you pledge. Equity funds are extremely volatile and their value could fall in a stock market crash. You would have to pledge more number of equity mutual fund units to make up for a shortfall, in case their value falls in a stock market crash. If you pledge debt mutual funds, you will be able to avail a loan which is higher than 50% of the NAV (Net Asset Value) of the fund you pledge. Many banks decide what is the minimum and maximum amount they would lend against mutual fund investments.

See Also: How To Invest in Mutual Funds

Eligibility for loan against mutual funds:

Following members can avail a loan against mutual funds:

  1. Indian residents over 18 years of age.
  2. For certain securities, only a member of Hindu Undivided Family (HUF), NRI, sole proprietor, partnership firm or a private limited company.

Who sanctions a loan against mutual funds?

You can avail a loan against your mutual fund investments from Public Sector banks, Private Banks and NBFC’s. These loans are available under the category “Loan against Security”. Banks decide the risk in sanctioning your loan against mutual funds.

What about interest charged on loan against mutual funds?

The interest rate charged is lower than a personal loan. It could be 10% to 13% a year, depending on the bank and the mutual fund investments pledged.

What you need to know before availing a loan against mutual funds?

You cannot avail a loan against any mutual fund. Banks have a list of eligible mutual funds and mutual fund schemes, against which they sanction your loan. The list of eligible mutual funds depends on the bank. You can avail a loan against both equity and debt mutual funds.

You cannot redeem (sell) your mutual fund units pledged with the bank, during the tenure of the loan. The dividends you receive from the mutual fund are yours.

Remember: Not many citizens are aware of loan against mutual funds. So they don’t avail it. The next time you need money in a hurry…you know where to look for a loan.

How and when to remove the lien on mutual funds?

Lien gives the lender/bank the right to sell mutual fund units or hold them. In simple words, a lien gives the bank, ownership of the fund units that you own till you repay the loan.

Once you repay the loan, the financier/lender can request for removal of the lien. They have to send a request letter to the fund house. In case the lender receives part payments, they can also request the fund house for a partial removal of lien. In such cases, the lien on only some units will be removed. Such units will be called ‘Free’ units while others will be under lien.

Not just the lender/financier, even you can enforce a partial removal of lien in case you make a part payment. If you fail to repay the loans in time, the lien can be reinforced. In such situations, the lender requests the mutual fund house to redeem the units and send the amount via cheque.

Benefits of getting on loan against mutual funds:

  • Loan against mutual funds are the best way to meet immediate financial requirements.
  • It has relatively shorter tenure than other loans.
  • It leverages your idle mutual fund investments.
  • You need not redeem your mutual fund units; therefore, your financial plan is not disturbed.
  • You will still have the ownership of your fund units after getting the lien removed on them.

Be Wise, Get Rich.

 

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IndianMoney.com Research Team

The research team at IndianMoney.com comprises of certified and experienced professionals who share the company's vision to make every Indian financially literate by equipping every Indian with right and unbiased advice. IndianMoney.com research team provides newsletters, articles, videos and FAQs on various financial products and concepts only to help you make wise financial decisions.

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