You often encounter financial emergencies that require immediate funds or cash. Under such circumstances, you may manage your immediate liquidity needs from your savings. However, if your savings are locked in different investments, then withdrawing money from the same may attract penalty charges. Moreover, you may be hesitant to redeem your stocks or mutual funds as it may disrupt your financial goals or lead to loss of long-term wealth generation potential.
Thus, the other option to tackle your financial crisis is to get loans. You may opt for secured or unsecured loans. You can use mutual funds as collateral for secured loans.
Few more things to know about loans against mutual fund investments:
1. Your existing lump sum or
SIP investments in mutual funds remain unaffected.
You can retain your mutual fund investments and pledge them with a bank or NBFC to obtain a loan. Based on the current value of your mutual fund and investment tenor, you will be sanctioned a loan.
However, in case of loan default, the bank will exercise its lien and redeem the mutual fund units through the fund house. The redemption amount will be used against your loan. Conversely, if you repay your loan, the fund house will revoke the bank’s lien over the pledged mutual fund and return the collateral to you as soon as it receives a confirmation from the bank.
In short, a loan against mutual funds doesn’t affect your ownership rights on the mutual fund units. They will be sold by the bank only if you fail to service your loan on time.
2. Loan Amount
Many banks specify the minimum and maximum amount you can borrow against your mutual funds. However, the loan limits vary from bank to bank. Usually, you can procure loans up to 50% of the value of pledged equity fund units and 70%- 80% of the value of pledged
debt fund units.
3. Interest rate
Secured loans carry lower interest rates than unsecured loans, as secured loans are asset-backed. As loans against mutual funds are asset-backed, they attract a nominal interest rate (as per prevalent market conditions). If you have a good credit score, you may obtain loans at lower rates.
4. Loan application procedure
Firstly, you need to open a current account with an overdraft facility. You can get a loan up to the stipulated overdraft limit by pledging your mutual fund units.
Secondly, you need to fill out the loan application form and grant a lien to the bank over the pledged mutual fund units. You must give details like folio number, number of units, mutual fund name, scheme, etc.
Thirdly, the completed application form will be sent to the mutual fund registrar along with the requisite documents. The registrar will mark the bank’s lien over the pledged mutual fund units.
Once the above formalities are complete, the bank will disburse the approved loan amount to you.
5. Procuring loans against mutual funds should be the last option
One of the investment myths surrounding mutual funds is obtaining loans against them in any market condition. However, since mutual funds are subject to market fluctuations, you may borrow loans against them only when markets are in a declining phase. During rising market phases, it may be better to redeem your funds rather than obtain a loan.
These were some facts and investment mythsabout loans against mutual funds. You may also note that you cannot redeem your mutual funds till your debts are cleared as the lender has a lien over them. You may check the list of approved fund houses before applying for a loan with any lending institution.
The information provided herein is meant only for general reading purposes and the views being expressed only constitute opinions and therefore cannot be considered as guidelines, recommendations or as a professional guide for the readers. The document has been prepared on the basis of publicly available information, internally developed data and other sources believed to be reliable. The sponsor, the Investment Manager, the Trustee or any of their directors, employees, affiliates or representatives (“entities & their affiliates”) do not assume any responsibility for, or warrant the accuracy, completeness, adequacy and reliability of such information. Recipients of this information are advised to rely on their own analysis, interpretations & investigations. Readers are also advised to seek independent professional advice in order to arrive at an informed investment decision. Entities & their affiliates including persons involved in the preparation or issuance of this material shall not be liable in any way for any direct, indirect, special, incidental, consequential, punitive or exemplary damages, including on account of lost profits arising from the information contained in this material. Recipient alone shall be fully responsible for any decision taken on the basis of this document.
MUTUAL FUND INVESTMENTS ARE SUBJECT TO MARKET RISKS, READ ALL SCHEME RELATED DOCUMENTS CAREFULLY.