No matter how convenient getting a personal loan is, the interest rates are so high that it becomes unaffordable to fulfil a particular financial goal. If your credit score is decent enough, you will be able to get a pre-approved personal loan as well. But the main issue is the unaffordable interest rate here, which can be solved by taking an alternative option for the same.
Taking a loan against mutual funds could be a better alternative option to a personal loan with a lower interest rate. Let’s dive deeper into it-
What does taking a loan against mutual funds means?
Taking a loan against a mutual fund means borrowing money from a lender by pledging your mutual fund units as collateral. The loan amount you can get depends on the value of your mutual fund units, which are typically held as security by the lender until you pay back the loan.
In this arrangement, you continue to hold your mutual fund units, and any returns or gains generated by the mutual fund remain in your account. However, you will need to pay interest on the loan amount, which can vary depending on the lender and the terms of the loan.
How is taking a loan against a mutual fund going to work?
The process starts with finding NBFCs who are actively disbursing the loan by pledging securities like mutual funds. Let’s understand everything that you need to know how the process going to work for you-
- Choose a lender:First, you need to choose a lender who provides loans against mutual funds. Banks, Non-Banking Financial Companies (NBFCs), and some mutual fund companies offer loans against mutual funds.
- Quality of mutual funds:Once you have identified a lender, you need to identify which of your mutual fund investments will fetch your maximum loan or the amount that you need the most, in the case when you have invested in multiple mutual funds.
- Percentage of the loan amount:The loan amount you can get depends on the value of your mutual fund units, which is determined by the Net Asset Value (NAV) of the mutual fund. Typically, you can get a loan amount of up to 50-60% of the value of your mutual fund units.
- Apply for the loan:After determining the loan amount, you need to apply for the loan. The lender may ask for documents such as your identity proof, address proof, mutual fund statement, and loan application form. The documentation process is minimal in taking a loan against security (LAS).
- Disbursement of loan: After the loan is approved, the lender disburses the loan amount to your bank account. You can then use the funds for your desired purpose.
- Repayment of loan: You need to repay the loan amount along with interest within the specified period. The interest rate may vary depending on the lender and the terms of the loan. You can either repay the loan in EMIs or as a lump sum at the end of the loan tenure.
- Release of mutual fund units:Once the loan is repaid, the lender releases the pledged mutual fund units, and you can continue to hold them in your account.
Saving the cost of the loan is a crucial part of personal financial management as it will not only help you reduce your efforts but also lead you to better debt management.
Anushka Trivedi is a freelance financial content writer. She can be reached at anushkatrivedi.com
Disclaimer: This story is for informational purposes only. Please speak to a SEBI-registered investment advisor before making any investment-related decision.