Are you aware of the fact that your mutual fund units, do not only generate returns for you, but you can also, use them as collateral for availing a loan?
Well, if you aren’t aware of this, then you should learn about how to avail loan against your mutual fund units, and what are the benefits of this. Read this blog and get to know everything about Loan Against Mutual Funds.
LOAN AGAINST MUTUAL FUNDS
Generally, people take loans, in order to get instant money that can take stand for their sudden financial crisis. If you would have heard about loans, then you must be knowing that, whether an individual takes a loan from banks or any moneylender in the market, they must submit a kind of collateral, as a guarantee, on their loans. The collateral can be their property papers, like the plot of land, their house, or many things.
Similarly, an investor investing in mutual funds can use their mutual funds unit as a form of collateral, for availing the loan.
However, mutual funds are liquid in nature and investors can redeem their unit in case of emergency, but the drawback is, when they redeem their fund, they get the value as per the current market performance of the asset, that is maybe they earn less benefit.
If investors avail of a loan, by using their mutual funds as their collateral, then they don’t need to redeem their fund, prematurely, in fact, they can continue their investments in their funds. This also ensures that their Systematic Investment Plan (SIP) can continue without hitch.
Investors can avail loan against equity or hybrid mutual funds by approaching any non-banking financial company (NBFC) or bank. Investors need to pledge their mutual fund units as security for the debt or loan, to the bank, in order to consider their loan request.
AVAILABILITY OF LOAN AGAINST MUTUAL FUNDS
As you know that you can avail loan against your mutual fund units, now it is important to learn, how much amount you can get in the form of a loan, against your funds. Generally, the amount of money that you can get depends on the type of mutual fund you own, like for example, equity-based funds can fetch you close to 50% of the Net Asset Value of your funds.
INTEREST RATES FOR LOAN AGAINST MUTUAL FUNDS
Taking a loan is a kind of easy process, burden rise when the time comes to repay the loan. The loans are repaid based on interest rates, so it is important to know about the interest rate associated with a loan against mutual funds. Loans are repaid at an interest rate of 10% to 11% on the mutual fund units, added, this will be subject to the terms and conditions set by the financier and loan tenure.
Well, investors should also know that, if they have a good credit score or they are a longstanding bank customer, then the bank manager may get agree for a lower interest rate on their loan.
LIEN FOR MUTUAL FUNDS
‘Lien’ means a kind of right to keep possession of the property, belonging to another person until a debt owed by that person is discharged or repaid. In mutual funds, Lien is a kind of document that gives the bank the right to the investor's fund, requesting for a loan. This right includes the selling or holding of the fund. Simply understand, when you mark your funds as collateral, then you grant the bank ownership of the fund units you own.
Investor’s then needed to approach fund houses and ask for a lien on their units in the name of the bank. All the unit holders must sign the request letter for lien transfer.
HOW AND WHEN TO REMOVE LIEN FROM MUTUAL FUND
Well, answer to when to remove Lien from mutual funds, is obviously when the investor has repaid the loan, the thing that is important, is how to remove the Lien from mutual funds. When the investor repays the loan amount, the financier can send a request to the fund house to lift the lien or remove the Lien on mutual funds.
Some things that should be kept in mind:
- Investors can ask for partial removal of lien, if they have paid a part of their loan amount to the financier, this will free up some units while the rest would still be under claim.
- The bank can reinforce the lien if the borrower fails to repay the loan in the duration agreed upon. In such situations, the lender can request the fund house to redeem the units and send the cheque to the lender.
HOW TO APPLY FOR LOAN AGAINST MUTUAL FUNDS?
Loans against mutual funds can be availed by both the mediums, either offline or online. In case if the investor has invested in mutual funds, in Demat form, then their loan can be easily sanctioned through online portals. If the investors own physical funds, then a loan agreement with the financier/bank should be in place.
When the bank or lender receives a request for the loan against mutual funds, they ask mutual fund registrar like CAMS or Karvy to mark a lien on the number of units being pledged. The registrar then marks the lien and sends a letter to the lender with a copy to the borrower confirming the lien.
One thing to be kept in mind is, investors cannot redeem their funds, until and unless they repay their loan amount.
BENEFITS OF LOAN AGAINST MUTUAL FUND UNITS
- When the investor requests for the loan against mutual fund units, then they would not have to sell their units thus their financial plan, remains intact.
- The interest rates for a loan against mutual funds can be lower than that for personal loan interest rate.
- Loan against mutual funds gives its investors instant liquidity against the mutual funds unit they own.
As of now, you would have understood that your mutual fund units are not only accumulating for your future financial goals, but you can also use them to fulfill your short-term money requirement by taking a loan against the mutual fund units you hold. The most beneficiary thing about this feature of a mutual fund is, you do not have to redeem your fund.
So, if you are also in need of money for situations like for the admission of your child in college, and many more, and you are thinking to take a personal loan, then do once think about taking a loan against your mutual fund units, it will be more convenient to you.
Most importantly, consult a financial planner or advisor, before doing anything with your mutual fund units. They will help you to understand the different concepts of mutual funds like taking a loan against mutual funds, in the best way.
You can also contact us at Shri Ashutosh Securities Pvt Ltd., we are here to help you in any way possible.
(Mutual Fund investments are subject to market risk Illustrations are for example only, there is no guarantee of returns. Past performance is not an indicator/guarantee to future returns).