Rising interest rates on loans have prompted many to relook at their debt options considering how many are forced to repay through higher EMIs or opt for an extended loan tenure.
One of the viable options in such times is loan against mutual funds.
One may seek a loan against mutual funds irrespective of why they need it. This helps, considering many feel more inclined to dip into their savings or redeem their mutual fund investments at a loss.
A loan against mutual fund investments ensures not only the desired debt amount but also continued investments in mutual funds that can be later redeemed for either reinvestment or kept aside as a corpus for the later years of your life.
Here are the things to keep in mind while opting for such a loan:
Type of mutual fund matters
Your mutual fund investment is one of the deciding factors in the amount of loan that you would get. This means that the lender would be foremost interested in the mutual fund schemes you have invested in. However, the outlook regarding mutual funds varies between lenders. This explains why some lenders approve of loan disbursals up to 50 percent of the Net Asset Value (NAV) of equity funds and 80 percent in the case of debt fund investments. Some other lending houses can go up to approving and allowing loan amounts of up to 60 percent and 85 percent of the value of equity mutual fund and debt fund scheme investments, 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 against equity and debt mutual 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 give such loans
Banks are selective about mutual fund investments while deciding against or in favour of loan applications. This is evident in how SBI Mutual Fund house disburses loans sought against SBI Mutual Fund schemes only. This is true of some of the biggest lending houses like HDFC Bank and ICICI Bank which disburse loans against selective schemes by asset management companies registered with Computer Age Management Solutions Private Limited (CAMS) only.
Cheaper loans when sought against mutual funds
The interest rate on a loan against mutual funds is lower than that of a credit card or personal loan. This is because loans against mutual funds are secured, which means they are backed by collateral. However, this varies depending on the bank and mutual fund schemes you select. If you pledge units of debt fund schemes, the interest rate is lower; if you pledge units of equity fund schemes, the interest rate is higher.
The benefit of continued returns
When you put your mutual fund units up as collateral for a loan, those units remain in the market. This is because when you pledge your mutual fund units with a bank, you grant the bank the right to sell the mutual fund units only if you default. Your investments, however, will remain market-linked and earn returns as long as you do not default.
A major benefit of seeking loans against mutual funds is that it takes care of your immediate capital requirements. This means that without jeopardising scheme ownership, you can borrow money from investment fund units for a short period of time and repay it over time. When you need liquid money but want to keep your mutual funds running smoothly, a loan against mutual funds can come in handy. This implies that when the market is failing, it is preferable to take a loan rather than redeem the units at a loss.