What is Loan against Mutual Funds?
A financial emergency can pop up at any time and in such cases, you may need money in a hurry. While not all mutual funds offer high liquidity, you can still use them as collateral to get loans from banks. Borrowing against mutual funds is a good alternative to consider in such situations. You don’t have to redeem your units prematurely and your Systematic Investment Plan (SIP) can continue uninterrupted. The process is similar to an overdraft facility offered by banks. You can approach a non-banking financial company (NBFC) or a bank to avail a loan against equity or hybrid mutual funds by pledging your mutual fund units as collateral for the debt. The loan amount will be based on the value of the units in your folio and the tenure you choose.
What are the Interest Rates for Loans against Funds?
The interest rate for this type of loan can be around 10-11% on the mutual fund units, but it will depend on the terms and conditions set by the lender and the loan tenure. The interest rate for this loan, being secured, is lower compared to an unsecured loan. If you have a good credit score or have been a long-standing bank customer, the bank manager might agree to a lower interest rate.
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What is Lien for Mutual Funds?
It is important to understand the concept of a lien on mutual funds before availing this type of loan. A lien is a document that gives the bank the right to sell or hold the fund. If you put a claim in the bank’s name, you grant the bank ownership of the fund units you own. You need to approach the fund house and request for a lien on your units in the name of the bank. All unit holders must sign the request letter for the transfer of lien.
How to Apply for Loan against Mutual Funds?
If you hold your units in Demat form and have prior permission, many online portals can sanction the loan quickly. If you physically own the funds, you will need to sign a loan agreement with the lender/bank. The lender will ask the mutual fund registrar such as CAMS or Karvy to mark a lien on the number of units being pledged. The registrar will then mark the lien and send a letter to the lender and a copy to the borrower confirming the lien. It is important to note that the lien is marked against the units and not the amount and you cannot redeem the units before you fully repay the loan.
What is the Availability of Loan against Mutual Funds?
The amount of money you can get as a loan will depend on the type of mutual fund you own. For example, equity-based funds can get you close to 50% of the Net Asset Value of your funds. Some banks also have a maximum and minimum cap on the loan amount that you can apply for.
How and When to Remove the Lien?
Once the loan is repaid, the lender can send a request to the fund house to lift the lien. You can also partially remove the lien if the lender receives partial payment, freeing up some units while the rest remain under claim. The bank can reinstate the lien if the borrower fails to repay the loan within the agreed duration or defaults. In such cases, the lender will request the mutual fund to redeem the units and send the cheque to the lender.
What are the Benefits of Borrowing against Mutual Fund Units?
Sometimes you might need some extra cash quickly, and if you have mutual fund units, you can use them as collateral to get a loan. This is called a loan against mutual funds, and it can be a great way to get some extra money without having to sell your investments. The interest rate on this type of loan is often lower than the interest rate on a personal loan. Plus, since you don’t have to sell your mutual fund units, your financial plan and investment stays intact. Not many people know about this option, but it can be a better choice than other traditional options for borrowing money.