If you have been investing in mutual funds, then you must be familiar that these tools not only help you start your investment journey but also help your hard earned money grow in the long run. Mutual funds can be used as collateral when seeking loans to pursue large purchases like a home, education, car, wedding etc. Loan against mutual funds offer a decent way by which investors can benefit from their investments. Read this blog post to understand the top six things when securing a loan against mutual funds.
Understanding Loan Against Mutual Funds
A hassle-free way to borrow money is to take out a loan against mutual funds. Mutual funds can be pledged and used as collateral when you need money. Let’s discuss how it works. The maximum amount you can borrow is usually determined based on the assessed value of the mutual funds you pledge as collateral and the lenders loan to value (LTV) ratio. These loans are very popular because they let you borrow money without having to liquidate your mutual funds.
Why apply for a loan against mutual funds?
Read these major reasons to know how to obtain and apply for a loan against mutual funds rather than regular loans:
- Enjoy Liquidity
When you apply for a loan against mutual funds, you must understand this key benefit of accessing immediate liquidity without selling your investments. It allows you to meet instant financial needs while your mutual fund investments grow and do the work for you.
- Lower Interest Rates
Another benefit of these types of loans is that they generally come with lower interest rates than personal loans or credit card advances. This is because the loan is secured against your mutual funds, reducing the overall risk.
- Hold Ownership and Earn Returns
When you take a loan against mutual funds, you can hold ownership of your mutual funds. You can still earn dividends and benefit from capital appreciation while using the loan amount for your financial needs.
- Hassle-free Loan Process
Obtaining a loan against mutual funds is quick and easy. Since your mutual fund investments are used as collateral, minimal paperwork is involved, and the loan approval and disbursal process is expedited.
6 things to know about loan against mutual funds
If you are applying for loans against mutual funds, then there are certain things to keep in mind, such as:
1. Loan-to-Value Ratio
First thing to know about these loans is the Loan-to-Value ratio. Different lenders offer varying LTV ratios, determining the percentage of your mutual fund units’ value that you can borrow. Usually, major lenders such as ICICI Bank offer between 50% ( in case of equity mutual funds ) to 80% ( in case of debt mutual funds ) of the current Net Asset Value (NAV) of your mutual funds. Always remember to compare LTV ratios from multiple lenders which can help you expand your borrowing capacity.
2. Repayment Flexibility
Repayment flexibility is an important factor when taking out a loan. Look for lenders who offer options to prepay or foreclose the loan without significant penalties. This flexibility allows you to manage your finances better and repay the loan at your convenience.
3. Impact on Investment Strategy
Pledging mutual fund units for a loan can impact your overall investment strategy. Consider the potential tax implications and how the loan might affect your long-term financial goals. Ensuring that your investments continue to align with your strategy is essential even while leveraging them for a loan.
4. Risk Awareness
Understand the risks associated with taking a loan against mutual funds. Market fluctuations can affect the value of your pledged units, and in volatile market conditions, you might face margin calls requiring additional security or partial repayment. Be aware of these risks to manage them effectively.
5. Documentation and Legal Aspects
Thoroughly review and understand all documentation related to the loan, including the loan agreement and collateral pledge. Ensuring clarity on the terms and conditions can help avoid misunderstandings or disputes in the future. Legal aspects should be clear and transparent to both parties.
6. Eligibility of Mutual Funds
Not all mutual funds are eligible for loans. Lenders accept equity and debt mutual funds from approved fund houses. Before applying for the loan, check with your lender to ensure that your mutual fund holdings qualify for the loan.
Are you eligible to apply for the loan?
Have you made up your mind to take out a loan against mutual funds? Check out some of the below given eligibility criteria before applying for a loan:
- Age- Applicants must be between the age bracket of 18 to 75 years of age.
- Collateral- Applicants can use both equity and debt mutual funds as collateral to secure the loan.
- Ownership- As an applicant, you must be the owner of the mutual funds pledged as collateral.
- Past credit track record and policy of the respective bank
Conclusion
Applying for a loan against mutual funds can be a smart financial decision, offering immediate liquidity, lower interest rates, and flexible repayment options. However, it is helpful to understand certain factors such as Loan-to-Value ratio, repayment flexibility, impact on your investment strategy, associated risks, and eligibility criteria to make informed choices.
It allows you to meet urgent financial needs while keeping your investments intact and growing. Careful consideration of these factors ensures that you can leverage your mutual fund investments effectively, balancing immediate financial demands with long-term financial goals.
