When you’re in need of funds, liquidating your investments isn’t always the best option. Instead, you can take a loan against mutual funds, offering a win-win solution. This blog will dive into how loans against mutual funds work, their benefits, and why they’re an attractive option for many investors.
What is a Loan Against Mutual Funds?
A loan against mutual funds allows you to borrow money by pledging your mutual fund units as collateral. Rather than selling your investments prematurely, you can use your units to secure a loan from banks or NBFCs (Non-Banking Financial Companies). The lender provides a loan based on the current NAV (Net Asset Value) of the pledged units
Why Choose a Loan Against Mutual Funds?
1. Quick Access to Funds:
Whether you’re dealing with a financial emergency or an investment opportunity, loans against mutual funds offer instant liquidity without disturbing your investments.
2. Lower Interest Rates:
Compared to personal loans or credit cards, loans against mutual
funds come with lower interest rates, making it a cost-effective option for borrowers.
3. No Impact on Fund Ownership:
The best part about this type of loan is that you continue to be the owner of your mutual funds. The units remain invested, and you benefit from capital appreciation and dividends during the loan tenure.
4. Flexible Loan Amounts:
Loan amounts typically range from 50% to 80% of the mutual fund’s value, depending on the lender’s terms and the type of mutual fund (equity or debt).
5. Flexible Repayment:
You can repay the loan as a lump sum or through EMIs (Equated
Monthly Instalments), providing flexibility based on your financial situation.
How to Apply for a Loan Against Mutual Funds:
1. Pledge Your Units:
You’ll need to submit a request to your mutual fund provider to
pledge your units to the lender.
2. Approval Process:
The lender will review your portfolio, and once approved, you can
access the loan amount.
3. Approval Process:
The lender will review your portfolio, and once approved, you can
access the loan amount.
4. Continue to Invest:
Even after pledging your mutual fund units, you can still benefit
from investment growth.
Factors to Consider:
1. Interest Rate:
Although loans against mutual funds have lower interest rates compared to unsecured loans, it’s essential to compare rates across different lenders.
2. Loan-to-Value (LTV) Ratio:
The loan amount depends on the type of mutual fund. Equity funds may offer up to 50% of the fund’s value, while debt funds can fetch up to 80%.
3. Risk of Market Fluctuations:
Since mutual funds are market-linked, a drastic drop in NAV could result in a margin call, where the lender asks you to repay part of the loan or pledge more units.
Conclusion:
Loans against mutual funds provide liquidity without having to sacrifice long-term investments. They are a strategic financial tool, allowing investors to unlock their wealth and cater to urgent
financial needs while keeping their portfolios intact.
Make the most of your mutual fund investments this Diwali. Whether you’re an NRI planning to secure your family’s financial future or someone looking for flexible loan options, Wealth Munshi is here to guide you. Explore our tailored financial solutions today!