All About Loan Against Mutual Funds
Posted on 30-May-2024
6 min read
Discover how a loan against mutual funds can work in favour of financing your immediate requirements. Read this blog post to learn about its benefits, interest rates, and online options.
Table of Content
Facing a financial need but don't want to sell your valuable mutual fund holdings? A loan against mutual funds might be the perfect solution for you! Whether you are a seasoned investor or an amateur just learning the way mutual funds work, a thorough understanding of loan against mutual funds can help you during emergencies, without selling all the units.
In this guide, we'll delve into what a loan against mutual funds entails, its benefits, interest rates, and how to access it online. Let's embark on this informative journey together!
Here’s how it typically works:
1. Application Process: You apply for the loan with a lender, usually a bank or a financial institution.
2. Pledging Mutual Funds: Your mutual fund units are pledged as security for the loan.
3. Loan Disbursement: Once approved, the loan amount, which is a percentage of the value of the pledged mutual funds, is disbursed to you.
4. Repayment and Interest: You continue to repay the loan over time, with the loan against mutual funds interest rate applied to the borrowed amount.
Opting for a loan against mutual funds online can be a strategic move for many investors, offering several advantages that are worth considering. Here’s a detailed look at the key benefits:
1. Maintained Investment Growth
One of the most significant advantages is that your mutual fund investments continue to grow even as you borrow against them. Since you are not liquidating all the units, they remain in the market, potentially earning returns. This means your long-term investment goals are not compromised for short-term financial needs.
2. Lower Interest Rates
Loans against mutual funds generally come with lower interest rates than unsecured loans like personal loans or credit cards. The reason is that these are secured loans backed by your mutual fund holdings as collateral. This security significantly reduces the lender's risk, leading to more favourable interest rates for you.
3. Loan Limits Tied to Your Investment
The loan amount hinges on the type of mutual fund you hold and the lender's policies. Each mutual fund and financial institution has its own set of rules determining how much you can borrow. This amount varies based on the risk profile and performance of your mutual fund investments.
Remember, there's always a ceiling and a floor to how much you can borrow. Banks and financial institutions set these limits to manage risk. It’s vital to know these ranges to ensure the loan meets your financial requirements.
4. No Impact on Credit Score on Approval
Since loans against mutual funds are secured, they generally have a lesser impact on your credit score compared to unsecured loans, provided they are managed well. Timely repayment of these loans can even help build a good credit history.
5. Quick and Easy Liquidity
Such loans provide quick access to funds, often with minimal paperwork and processing time compared to other types of loans. This can be incredibly beneficial in situations where you need immediate cash flow, be it for emergencies, business opportunities, or personal expenses.
6. Diverse Usage
The loan amount can be used for various purposes, unlike certain other types of loans, which may have restrictions on their usage. Whether it’s for handling a medical emergency, financing a wedding, or funding education, these loans offer the versatility to cater to diverse financial needs.
Typically, below is the process to apply for a loan against mutual funds:
• Step 1: Login to the netbanking of the respective bank or financial institution.
• Step 2: Accept the loan agreement through OTP recieved on your registered mobile number.
• Step 3: Complete the application form with the required information.
• Step 4: Choose the loan amount you wish to avail.
• Step 5: Complete the KYC formalities and enter your bank details for e-mandate.
• Step 6: Your loan against MF shall be disbursed upon successful pledging and verification of your mutual funds
• Get quick access to funds in your account within minutes.
• Loans are applicable to both debt and equity mutual funds.
• You can keep your mutual funds portfolio without selling them.
• Even if you are a first-time borrower without a credit history, you can get a loan.
• Interest is charged only on the amount you use.
• You can use the funds without any restrictions.
A loan against mutual funds stands out as an effective financial solution for those needing immediate liquidity without disturbing their investment growth. It offers numerous advantages, including lower interest rates, flexibility, and the potential to continue earning investment returns. This approach is particularly advantageous when compared to other forms of credit, providing a balance between meeting immediate financial needs and maintaining long-term investment goals.
1. Can I take a loan against mutual funds held in a joint account?
Yes, loans against mutual funds can typically be availed on holdings in a joint account. However, all joint holders will need to be co-applicants for the loan.
2. Is there a pre-closure penalty for loans against mutual funds?
This depends on the lender's policy. Some institutions may charge a pre-closure penalty, while others offer the flexibility to pre-close the loan without additional charges. It's important to clarify this with your lender beforehand.
3. Are there any tax implications for availing a loan against mutual funds?
Taking a loan against mutual funds does not, in itself, lead to any immediate tax implications. However, it's advisable to consult a tax advisor for detailed guidance, as individual circumstances can vary.
4. Can I pledge any type of mutual fund for a loan?
Not all mutual fund schemes are accepted by lenders for loans. Generally, debt funds are more widely accepted than equity funds due to their lower risk profile.
5. What happens to my mutual fund units if I default on the loan?
In the event of a default, the lender has the right to sell the pledged mutual fund units to recover the loan amount. This can lead to a loss of your investment.
6. Does availing of a loan against mutual funds affect my SIPs (Systematic Investment Plans)?
Taking a loan against mutual funds does not directly affect your ongoing SIPs in those funds. Your SIPs can continue as usual, but the pledged units will be encumbered.
7. Are NRIs eligible for loans against mutual funds in India?
NRIs can apply for loans against mutual funds in India, but the terms and eligibility criteria might differ from those for resident Indians. NRIs needs to check with specific lenders for their terms.
In this guide, we'll delve into what a loan against mutual funds entails, its benefits, interest rates, and how to access it online. Let's embark on this informative journey together!
What is Loan Against Mutual Funds?
A loan against mutual funds is a type of secured loan where borrowers can avail of funds by pledging their mutual fund units as collateral. Some of the banks and financial institutions provide this type of loan. The crux of this arrangement lies in its ability to offer you immediate liquidity, meaning you can access cash when you need it most without selling off your investments.Here’s how it typically works:
1. Application Process: You apply for the loan with a lender, usually a bank or a financial institution.
2. Pledging Mutual Funds: Your mutual fund units are pledged as security for the loan.
3. Loan Disbursement: Once approved, the loan amount, which is a percentage of the value of the pledged mutual funds, is disbursed to you.
4. Repayment and Interest: You continue to repay the loan over time, with the loan against mutual funds interest rate applied to the borrowed amount.
What Are the Key Benefits of Loan against Mutual Funds?
Opting for a loan against mutual funds online can be a strategic move for many investors, offering several advantages that are worth considering. Here’s a detailed look at the key benefits:
1. Maintained Investment Growth
One of the most significant advantages is that your mutual fund investments continue to grow even as you borrow against them. Since you are not liquidating all the units, they remain in the market, potentially earning returns. This means your long-term investment goals are not compromised for short-term financial needs.
2. Lower Interest Rates
Loans against mutual funds generally come with lower interest rates than unsecured loans like personal loans or credit cards. The reason is that these are secured loans backed by your mutual fund holdings as collateral. This security significantly reduces the lender's risk, leading to more favourable interest rates for you.
3. Loan Limits Tied to Your Investment
The loan amount hinges on the type of mutual fund you hold and the lender's policies. Each mutual fund and financial institution has its own set of rules determining how much you can borrow. This amount varies based on the risk profile and performance of your mutual fund investments.
Remember, there's always a ceiling and a floor to how much you can borrow. Banks and financial institutions set these limits to manage risk. It’s vital to know these ranges to ensure the loan meets your financial requirements.
4. No Impact on Credit Score on Approval
Since loans against mutual funds are secured, they generally have a lesser impact on your credit score compared to unsecured loans, provided they are managed well. Timely repayment of these loans can even help build a good credit history.
5. Quick and Easy Liquidity
Such loans provide quick access to funds, often with minimal paperwork and processing time compared to other types of loans. This can be incredibly beneficial in situations where you need immediate cash flow, be it for emergencies, business opportunities, or personal expenses.
6. Diverse Usage
The loan amount can be used for various purposes, unlike certain other types of loans, which may have restrictions on their usage. Whether it’s for handling a medical emergency, financing a wedding, or funding education, these loans offer the versatility to cater to diverse financial needs.
How Can I Get a Loan against Mutual Funds?
Typically, below is the process to apply for a loan against mutual funds:
• Step 1: Login to the netbanking of the respective bank or financial institution.
• Step 2: Accept the loan agreement through OTP recieved on your registered mobile number.
• Step 3: Complete the application form with the required information.
• Step 4: Choose the loan amount you wish to avail.
• Step 5: Complete the KYC formalities and enter your bank details for e-mandate.
• Step 6: Your loan against MF shall be disbursed upon successful pledging and verification of your mutual funds
Features of Loan against Mutual Funds
Here are the features of the loan against mutual funds:• Get quick access to funds in your account within minutes.
• Loans are applicable to both debt and equity mutual funds.
• You can keep your mutual funds portfolio without selling them.
• Even if you are a first-time borrower without a credit history, you can get a loan.
• Interest is charged only on the amount you use.
• You can use the funds without any restrictions.
Conclusion
A loan against mutual funds stands out as an effective financial solution for those needing immediate liquidity without disturbing their investment growth. It offers numerous advantages, including lower interest rates, flexibility, and the potential to continue earning investment returns. This approach is particularly advantageous when compared to other forms of credit, providing a balance between meeting immediate financial needs and maintaining long-term investment goals.
FAQs
Here are some of the commonly asked questions about loan against mutual funds:1. Can I take a loan against mutual funds held in a joint account?
Yes, loans against mutual funds can typically be availed on holdings in a joint account. However, all joint holders will need to be co-applicants for the loan.
2. Is there a pre-closure penalty for loans against mutual funds?
This depends on the lender's policy. Some institutions may charge a pre-closure penalty, while others offer the flexibility to pre-close the loan without additional charges. It's important to clarify this with your lender beforehand.
3. Are there any tax implications for availing a loan against mutual funds?
Taking a loan against mutual funds does not, in itself, lead to any immediate tax implications. However, it's advisable to consult a tax advisor for detailed guidance, as individual circumstances can vary.
4. Can I pledge any type of mutual fund for a loan?
Not all mutual fund schemes are accepted by lenders for loans. Generally, debt funds are more widely accepted than equity funds due to their lower risk profile.
5. What happens to my mutual fund units if I default on the loan?
In the event of a default, the lender has the right to sell the pledged mutual fund units to recover the loan amount. This can lead to a loss of your investment.
6. Does availing of a loan against mutual funds affect my SIPs (Systematic Investment Plans)?
Taking a loan against mutual funds does not directly affect your ongoing SIPs in those funds. Your SIPs can continue as usual, but the pledged units will be encumbered.
7. Are NRIs eligible for loans against mutual funds in India?
NRIs can apply for loans against mutual funds in India, but the terms and eligibility criteria might differ from those for resident Indians. NRIs needs to check with specific lenders for their terms.
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