Loan against Mutual Funds: Mutual Funds are generally medium- or long-term investments. But in case of emergencies, investors can easily avail of loans against mutual funds without having to sell their investments. But investors should note that a loan against their investment can delay their road to reaching their financial goal. If the investment is kept untouched, the returns can be really attractive depending on the basket of stocks.
One of the biggest benefits of availing of a loan against mutual funds is that the interest rate on the loan is much lower than credit card loans or personal loans. Further, the interest rates are lower on debt fund schemes but comparatively higher for units of equity fund units.
Here are a few things to note before availing of the loan against mutual funds
Eligibility
Most banks and non-banking financial companies (NBFCs) offer loans against mutual fund investment to investors, firms, trusts, companies, and any entities. The rule is not applicable to minors. For individual investors, the cut age for availing of such loans is 21 years.
Other eligibility criteria are the credit score of the applicant or firm, and steady income. A higher credit score may help the applicant to negotiate for a lower interest rate. The loan amount, tenure, and interest rate are fixed by the bank/financing institution.
Secured or unsecured
The loans against mutual funds are of two types: secured and unsecured. A secured loan can be defined as one backed by collateral, such as your mutual fund investments. Secured loans usually have lower interest rates, but you may have to pledge a larger portion of your mutual funds as collateral.
An unsecured loan is not backed by any collateral. These loans are similar to credit card loans or personal loans and are not backed by any financial assets owned by loan seekers. Therefore, bank charge a higher interest rate.
Things to note
Loan terms
Investors seeking to avail a loan against mutual funds should carefully read the loan terms offered by the bank. They should look at the interest rate, loan tenure, and other charges, and calculate the payback amount. They can also compare the offers from other schemes to opt for the best deal.
Required documents
While applying for a loan against mutual funds, investors have to furnish documents like proof of identity, proof of income, and proof of ownership of the mutual fund investments. The banks may also ask the investor to provide a copy of their bank statement, PAN card, and other financial documents.
Pledge your mutual funds
Investors must pledge their mutual funds as collateral with the lender against the loan they are availing. Therefore, till the loan is repaid, the lender will have a lien on your mutual funds.
Repayment of loan
Investors should carefully check the repayment clauses of the loan against the mutual funds. In some cases, if investors pay back a partial amount of the loan, that proportion of mutual fund units may be made free from the lien. MF investments can still earn dividends even if the investor has taken a loan against it.
Failure to repay the loan on time may result in the lender selling your mutual fund investments to recover the loan amount.
