Loan Against Mutual Funds
You have mostly come across borrowing loans against land, gold, or a house. But, if you’ve put your money in a mutual fund investment, can you take a loan against it?
Let’s find out.
An overdraft against mutual funds, could it be? There are always emergencies, right, be they Small or Big? It can happen. There can be a time in those situations when you can fall short of money in a short-term aspect. Investing in funds is known to be liquid, but not all funds have high liquidity. Sometimes you would not be ready to redeem your fund as it would interrupt your financial goal, and liquidating it can be out of the picture.
So a loan against this find could be an opportunity to keep the find and still be supplied with the finance, right?
Let us also make it clear that not all banks would accept mutual fund investments from fund houses.
How to Take Loan Against Mutual Fund - Pointers to Note
– You Can Avail of Loans to Only a Certain Limit of your Mutual Fund Holding
The amount of loan you may acquire against your mutual fund holdings is primarily determined by the sort of mutual fund scheme in which you have invested and the financial institution from which you will borrow.
– The Loan You Can Get Has an Upper Limit
Loans against mutual funds, like any other form of loan, have specific restrictions. Many banks have a maximum and minimum loan amount that you can get.
– You won’t Get these Loans From All the Banks
Many banks only lend money against a certain set of mutual fund plans that they have chosen.
– It will Cost you Less for a Loan Against Mutual Funds than Personal Loans or Credit Cards
A significant advantage of a loan against mutual funds is that the interest rate is lower than that of credit cards or personal loans. This is due to the fact that loans against mutual funds are secured, that is, they are guaranteed by collateral.
– You Will Still Continue to Earn Returns on your Pledged Mutual Funds
When you pledge your mutual fund units to secure a loan, those units remain invested in the market. This is due to the fact that when you pledge your mutual fund units to a bank, you grant the bank the right to sell the mutual fund units only if you default. However, as long as you do not default, your assets remain market-linked, and you continue to receive profits on them.
What are the Advantages of Taking a Loan Against Mutual Funds?
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You Get a Lower Interest Rate
Loans against mutual funds often have lower interest rates than personal loans. Because it is a secured loan, the interest rate is lower than that of unsecured loans.
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You Do Not Need to Redeem your Mutual Fund
Investors are not required to redeem the MF plan in order to get loans against it. The units are pledged as security for loans but are not sold, allowing investors to get loans while maintaining ownership. In fact, if money is tight, it is best not to sell the apartments and instead take out a loan against them.
You may also want to read What is Mutual Fund Redemption and How to Redeem Fund Units
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Quick Money
It is useful when there is a need for rapid cash. In times of financial crisis, one can pledge fund units even online and get money into an account. Because you are already an investor, the loan application process is simplified, with minimal documentation and eligibility requirements.
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A Source of Short-Term Capital Needs
Loans against MF might be beneficial when money is needed for short-term purposes. You can raise cash from investment fund units for a short period of time and repay it gradually without jeopardizing scheme ownership.
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Pay Interest for the Used Loan Amount
Interest is not to be paid on the full loan amount promised from the investment plan but only on the amount actually utilized, that is, the amount credited or overdraft from the current account.
When you want to continue your mutual funds without a hitch but the problem is you need liquid money, a loan against mutual funds interest rate, a loan against sip, or an overdraft can come in handy. This is one of the most prominent benefits of the option of availing of a loan against your mutual fund.
Conclusion
When there is a failing market, it is better to take a loan instead of redeeming the units at a loss or so. You can take a loan, which can prove to be more beneficial.
When you do this, you have not liquidated your fund, and when the market does better, the price of your share will rise up again. In a bull market where all funds are profitable, it is preferable to sell the units rather than borrow. If you are in a bull period, redeem. Borrow during a down market. If you require money quickly, be sure you borrow sensibly.