Rising interest rates on loans have prompted many people to reconsider their borrowing options given the number of people forced to repay through higher EMIs or opt for an extended loan term.
One of the viable options in these times is lending against mutual funds.
One can apply for a loan against mutual funds for whatever reason they need it. This helps, as many feel more inclined to dip into their savings or redeem their mutual fund investments at a loss.
A loan against mutual fund investments not only secures the desired amount of debt, but also continuous investments in mutual funds which can then be redeemed for reinvestment or set aside as a corpus for future investors. last years of your life.
Here are the things to keep in mind when opting for such a loan:
Mutual fund type
Your investment in a mutual fund is one of the determining factors of the loan amount you would get. This means that the lender would be primarily interested in the mutual funds in which you have invested. However, the outlook for mutual funds varies from lender to lender. This explains why some lenders approve loan disbursements of up to 50% of the net asset value (NAV) of equity funds and 80% in the case of investments in debt funds. Some other lending houses may go so far as to approve and authorize loan amounts of up to 60% and 85% of the value of investments in mutual funds and debt funds, respectively.
Limit on loan amount approval
Loans against mutual funds, like any other type of loan, are subject to certain conditions. Many banks have maximum and minimum loan amounts available. The minimum and maximum loan amounts allowed on mutual and debt funds are ₹20 lakh and ₹1 crore, respectively. However, this loan amount limit is usually higher in the case of non-banking financial companies (NBFCs).
Not all banks are willing to provide such loans
Banks are selective about investments in mutual funds while deciding against or in favor of loan applications. This is evident in the way SBI Mutual Fund home disburses requested loans against SBI mutual fund schemes only. This is the case with some of the largest lending companies like HDFC Bank and ICICI Bank which provide loans against selective programs by asset management companies registered with Computer Age Management Solutions Private Limited (CAMS) Alone.
Cheaper loans when sought against mutual funds
The interest rate on a mutual fund loan is lower than that of a credit card or personal loan. This is because loans against mutual funds are collateralised, meaning they are backed by collateral. However, this varies depending on the bank and mutual fund plans you select. If you pledge debt fund units, the interest rate is lower; if you pledge equity fund units, the interest rate is higher.
The advantage of continuous returns
When you pledge your mutual fund shares as collateral for a loan, those shares remain in the market. This is because when you pledge your mutual fund shares to a bank, you are granting the bank the right to sell the mutual fund shares only if you default. Your investments, however, will remain linked to the market and will generate returns as long as you are not in default.
A major advantage of seeking loans against mutual fund is that it takes care of your immediate capital needs. This means that without jeopardizing plan ownership, you can borrow money from mutual fund shares for a short period of time and pay it back over time. When you need cash but want to keep your mutual fund works well, a mutual fund loan can help. This implies that when the market fails, it is better to take out a loan than to buy back the shares at a loss.
Investors can invest in ELSS mutual funds to save income tax.
First publication: January 01, 2023, 10:20 a.m. STI