Mirae Asset Financial Services recently launched a new offering of giving loan against mutual fund units.
This will be done via a mobile phone app where investors can avail loan against mutual fund within a short span of time. The amount of loan can range between ₹50,000 and ₹3 crore by pledging their mutual fund units.
Although it is common practice among investors to sell mutual fund units, wherein they have invested to meet long term goals for meeting instant cash needs.
So, the lender tries to solve this problem by providing cash when investors need them instead of having to redeem the fund units.
Krishna Kanhaiya, CEO, Mirae Asset Financial Services said “Most investors redeem their investments done for long-term goals to meet short-term needs like managing liquidity in business, house renovation or medical emergencies which is fundamentally incorrect. We want to help customers by providing access to funds whenever they need them.”
Mirare Asset is set to join hands with mutual fund distributors to expand its reach.
What do financial experts advise?
Loan against mutual funds may not be a very prevalent way to raise money, but loan against securities (LAS) is not a novel phenomenon either. ICICI Bank already offers loans against securities by way of an overdraft.
The private lender offers loan up to 50 percent of the value of the pledged shares with a maximum limit of ₹20 lakh.
However, there is a catch.
This facility of LAS is available only against a limited list of securities approved by the bank. And since it is an overdraft, interest is charged on the utilised amount and that too for the utilised period.
So, the loan against securities or the one against fund units can turn out to be boon for some, financial advisors do not seem to be impressed.
Sridevi Ganesh, co-founder of Chamomile Investment Consultants in Chennai, says that it is not advisable to take loan on mutual fund as they are volatile assets and keeping them as security can disrupt investors’ long-term financial goals and discipline.
Amol Joshi, Founder of PlanRupee Investment Services, also advises against taking such loan. “One should avoid taking loan against fund units unless the market is really bad such as what happened on March 23, 2020. This kind of fall, i.e., 30 percent or so, happens once in a decade. Barring such exceptions, taking loan against mutual funds should be avoided,” he said.
At the same time, Abhishek Dev, Co-Founder and CEO, Epsilon Money, said borrowers must be careful about the cost of these loans and tenure for which they have raised them.
“Loan against mutual funds is a popular solution globally, which allows you to create temporary liquidity without having to sell your investments. Premature withdrawals from investments may have tax, returns and exit load implications, which could be avoided by drawing a loan on them instead. However, the cost and tenure of loan must be considered before making such decision,” he said.
So, it is vital to exercise due caution before pledging fund units to raise loan.