You can get a loan against your mutual fund investment — Here’s how
- Yes, it is very much possible to take a
loanagainst your mutual fund investment.
- Such loans give an investor immediate liquidity against investment in
mutual fundsand meet short term capital requirements.
- Typically, one can get upto 80% of the total investment value on debt funds and 60% of the total amount in equity funds.
To help you understand the idea behind such loans, let’s assume you have a portfolio of ₹5 lakh in mutual fund schemes. Suddenly you require ₹2 lakh for a personal emergency, but you don't want to redeem your investment from mutual funds. In such cases, there is an option to keep your mutual funds units as collateral with banks, non banking financial companies (NBFCs), financial institutions and take a loan against them.
Now how does this exactly work? Let us understand the process to avail loans against mutual funds.
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Similar to other loans where a house or gold is kept as security to borrow money, here mutual fund units in demat accounts are kept as collateral with banks.
Now, each financial institution will have a list of approved mutual funds against which they are willing to give loans to the investors.
Further, to apply for such a loan, investors first need to enter into an agreement with the bank and the mutual fund house that ensures to sell the fund in case the investor is unable to pay dues in the future.
This agreement/contract is called a lien. This agreement gives rights to the lender to sell the funds if a borrower is unable to pay. The agreement is signed to ensure that the investors do not redeem money from the mutual fund scheme before they repay the lender.
To avail such loans, you need to approach the fund house and ask for a lien on your investment in the name of the lender. You can get loans through online and offline mode.
Amount of loan one can get
AdvertisementThe amount of loan one can borrow from a mutual fund depends on the size of the portfolio and the category of mutual funds one owns. Typically, one can get up to 80% of the total investment value on debt funds and 60% of the total amount in equity funds. Equity oriented mutual funds invest in shares of companies while debt funds invest in fixed income securities like government securities, bonds and so on.
However, the loan amount a consumer is applicable to differs from bank to bank. Some banks may offer 50% loan of the net asset value of your fund while another may give 60% of the value of the mutual fund.
One good thing is that although you can’t redeem your funds as you have kept it as a security to the lender, you will continue to remain invested and earn returns, dividends if any.
AdvertisementInterest rates for such loans
Now, although rates of interest for such loans are typically more than 10% per annum across lenders, there is a scope to negotiate the interest rates.
You can negotiate to lower the interest rates with the bank providing the loan and they may even consider it if your credit score is good.
Benefits of borrowing against mutual funds
- Gives you immediate liquidity against your investment in mutual funds.
- Allows you to raise short term capital requirements.
- Saves you from redeeming mutual funds investments in case of emergencies.
- Keep your financial plan intact.
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