There are situations in life where you might experience unforeseen problems financially, like medical emergencies, family expenses, etc. In such cases, there is often an urgent requirement for cash or for using your savings. However, there are better alternatives for seeking loans, even in such cases. Getting a loan against mutual funds is one of the alternatives.
By getting a loan against mutual funds, you need not encash or redeem your investments. Loans against securities help you quickly raise funds for your requirement. Interests are charged on the amount utilised based on the tenure for which the loan is taken. An interest rate of 7-15% p.a on loans against Mutual Funds will be charged based on the bank and tenure. You can get loans against MF holdings from banks and non-banking financial companies (NBFCs).
Let us briefly understand Mutual Funds before diving into loans against mutual funds.
Introduction to Mutual funds
Mutual Funds are an investment avenue where people invest in securities like stocks, bonds, money market instruments, or other assets. An organized institution manages the money - professional money managers allocate the assets and produce capital gains for the investors. They invest in several securities like portfolios of equities, bonds, etc. Mutual funds always depend on the performance of the securities in which they are invested. The price of an MF share is known as the Net Asset Value per share (NAVPs).
There are four types of mutual funds
- Stock Funds: These are mutual funds that invest in equity or stocks. These funds are named based on their small-cap, mid-cap, and large-cap investments.
- Bond Funds: Bond funds are mutual funds that generate a set of return values that is part of fixed incomes, such as government bonds, corporate bonds, etc. The interest income generated is passed on to the shareholders. These types of funds are generally vulnerable to interest rate risk.
- Index Funds: These mutual funds invest in stocks corresponding to the primary market index.
- Balanced Funds: These funds generally involve investment in a hybrid of asset classes, like stocks, bonds, and money market instruments. It is done to reduce the risk of exposure across asset classes.
Apart from the funds mentioned above, we also have mutual funds such as money-market, income, global, speciality, and exchange-traded funds.
How Do Loans Against Mutual Funds Work?
When you acquire a loan against MF, the amount of loan you get depends on the type of mutual fund schemes you have invested in and the financial institution from which you will borrow. The mutual fund units are utilized as collateral while applying for a loan against securities. The banks will keep the mutual fund units in their custody as collateral until the loan debts are repaid. However, the mutual funds will continue to remain invested. Once the loan is paid off, the fund house will release the lien to the financier.
In case of a default in payment, the bank will reinforce the lien and instruct the mutual funds to redeem the units, thereby settling the value of the mutual fund investment against the loan amount.
About Loans Against Mutual Funds?
- If you seek a loan on mutual funds, you can only secure a limited amount because loans against mutual funds have upper limits.
- The minimum limit for loans against mutual funds is Rs. 5 lakhs, and the maximum is Rs. 2 crores.
- The interest rate for loans against securities starts at 10.5%.
- Eligibility - Debt and equity funds are eligible for a loan.
- Earn returns on your pledged mutual funds- When you take a loan against mutual fund units, these mutual fund units stay invested in the market. The banks can sell the mutual funds only in case of a default in payment.
- Loans are available to customers who do not have any credit history.
- The loans on mutual funds will be processed instantly. Funds will be available within minutes in your bank account.
What are the key benefits of availing of a loan against Mutual Funds?
It is crucial to understand the advantages before availing of a loan against mutual funds. Here are some of them:
- You can avail of loans through online mode and claim them instantly. You need not undergo time-consuming processes and waste your time. You can get an instant loan in 3 simple steps. You will receive the loans instantly by pledging your mutual fund units and setting an overdraft limit.
- You can make interest payments by crediting your loan account every month. The interest will be charged only on the amount on the part of the loan that you use.
- Unlike other means of borrowing money, you can claim the loan against mutual funds quickly.
- Interest rates on loans against mutual funds are lower than the interest rates on personal loans.
Applying for loans against Mutual Funds:
If you own funds in physical form, then there are these options:
- Establish a loan agreement with the bank.
- Convert the physical units into electronic form.
- You can apply for the loan online through your internet banking account.
- Once your application is verified successfully, the loan processing will start.
- The bank lending the loan will ask the mutual fund registrar to mark a lien on the number of units pledged.
- The register sends a letter confirming the lien with a copy to the borrower.
What is the loan against mutual fund eligibility criteria?
The following lists down the loan against mutual funds eligibility:
- Indian Residents
- NRIs
- If you are a major (above 18 years of age).
- If you own a Partnership firm, Private Trust, Private or Public company.
Hence, verifying the loan against mutual fund eligibility is essential to examine if the candidate fits the criteria.
To Summarize
Loans against mutual funds involve using the pledged funds to claim loans. Some benefits include paying only interest payments, flexible prepayments, lower monthly payments, and shorter loan tenure. The amount or rate of interest may vary depending on the type of mutual fund or the mutual fund company. Opting for a loan against securities allows the borrower to utilise the funds disbursed effectively. It is considered a wise choice.
Loans against mutual funds are a better alternative than a credit card or a personal loan. The interest rate on loans against mutual funds is lower than for loans against gold or FDs (fixed deposits). So if you are looking for a loan against securities, visit Tata Capital and apply for a loan against mutual funds today!
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08 February 2024
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