Mutual Fund investors have the advantage of availing loan facility against their MF investments in times of need. They can get credit against units purchased in their mutual fund scheme in the form of overdraft facility. Banks and financial institutions have a list of approved mutual fund plans to sanction loan facilities to investors. Interest is charged only on the amount taken as credit.
How do Loans Against Mutual Funds work?
Loan is provided against pledge, transfer or lien of shares, mutual funds, insurance policies, bonds and other such approved securities. In times of dire need, when you need to take a loan you can pledge your mutual fund investments and get an overdraft limit. Banks usually fix a limitation of minimum and maximum loan amounts an investor can borrow based on the units owned by the investor. Banks open up a current account with an overdraft facility for the borrower.
An investor can get credit of up to 50%-60% of the Net asset Value (NAV) in case of Equity Funds and up to 70-80% for Debt Mutual Funds. This amount given as loan which is lesser than the total market value of these units is also known as haircut or margin.
Advantages of Loan against Mutual Funds
Rate of interest is usually lesser on loans against mutual funds than any personal loan. As it is a secured loan, its interest rate is lesser than any unsecured loans
Interest is not to be paid on the entire pledged amount of loan from the investment plan but only the amount which is actually used i.e. the amount credited or overdrafted from the current account
It is effective when there is a need for quick money. One can pledge fund units even online and get money into account in times of financial crisis. The procedure to avail a loan is easier, requiring minimal documentation and eligibility formalities as you are already an investor
In case of the necessity of money for short term goals, loans against MF can bring value. You can raise capital from the invested fund units for a short duration and repay gradually without compromising on the scheme ownership
Loans against MF have both easy approvals and disbursals, usually without any foreclosure or prepayment charges. You can repay the loan amount as per your convenience. Through flexi loan facility you can pay EMIs regularly and pay the principal amount later. Investors can request the banks to lift lein once repayment is done. Even partial lien can be lifted if a certain amount is repaid
Investors do not need to redeem the MF plan for loans against it. The units are pledged as a collateral for loans but aren’t sold and investors can get loans without losing the ownership. Infact, if there’s an urgency for money, it is better not to sell the units but rather avail a loan against it
Should You Take Loan Against Mutual Fund
On any given day, there can be a shortage of bank balance or there may be an essential need of a large sum of money which may/may not be available with a person. If a person chooses to take loan for fulfillment of his/her aspirational requirements, then loan against mutual fund can be a good alternative. The advantages stated above substantiate the statement. However, you may consider selling off the units if your returns significantly outrun your invested amount, when markets are favourable. It is not suggested to do so in a bear market.
On the other hand, some investors tend to sell off the fund units when markets are down in order to escape from further capital loss. Instead of selling the units and redeeming the plan, it is better to avail loan against MF, if one is looking for liquidity. This keeps your fund ownership intact as well as saves you from loss of sale of units at a lower price. Funds will grow eventually and capitalise once the markets recover.
