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Loan Against Mutual Funds

IndianMoney.com Research Team | Updated On Wednesday, May 04,2016, 01:08 PM
3.0 / 5 based on 13 User Reviews

Loan Against Mutual Funds

You need money in a hurry? What is the first thought that comes to your mind. Avail a personal loan….What better loan than a personal loan, where you do not need to give any reason why you need this loan? But there is a problem…. Personal loan charges you a very high rate of interest. The interest rate could be as high as 15% to 17% a year. Personal loan is an unsecured loan. You do not have to give any collateral (security) to avail a personal loan. In exchange for this benefit, you have to pay a higher rate of interest on this loan. Can't you find a better loan than this? What about a loan against mutual funds?

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.

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.

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.

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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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