Why sell when you can take a Loan Against Mutual Funds? Loan Against Mutual Funds might be a hidden Gem for you. In today’s financial landscape, maximising the potential of your investments is the key to success. That’s where a loan against mutual funds comes into play, allowing you to tap into the hidden power of your mutual fund investments and unlock the much-needed liquidity without actually selling your units.
But what exactly is a loan against mutual funds, and how can it benefit you? In this comprehensive guide, we will dive deep into the concept of loan against mutual funds, exploring what it entails, the benefits, and the potential risks.
Whether you’re looking to meet a sudden expense, fund a new venture, or seize an investment opportunity, a loan against mutual funds can be a flexible and convenient option.
Table of Contents
Understanding the concept of mutual funds
A Mutual Fund scheme is an investing scheme in which many investors invest ( pool in) their money. This mutual fund scheme invests this money ( investor’s money) in stocks, bonds or Securities and earns returns. The MF scheme is managed by a professional fund manager and team- who make investment decisions.
Learn more about Mutual Funds –Beginners Guide To Mutual Fund
SIP Or Mutual Fund – What Is The Difference & Example
What is Loan Against Mutual Funds
Loan Against Mutual Funds (LAMF) is a financial solution that allows you to create an overdraft facility against your mutual fund units. You can easily lien mark your Mutual funds digitally and raise the funds you need.
The loan is an overdraft facility, allowing you to access the funds you need and repay them at any time. Interest is charged only on the utilised amount and for the duration, the funds are utilised.
You can choose from a variety of approved mutual funds from various asset management companies (AMCs) in India and use them as collateral. To lien mark, you can use mutual funds registered with CAMS and KFintech (previously known as KARVY), Registrars & Transfer Agents (RTAs) as collateral.
Loan against mutual funds procedure
- Download the app or apply via web
- Select type of mutual funds (viz equity or debt mutual funds)
- Complete one-time KYC registration with PAN & Aadhaar details (Details can be fetched directly from Digilocker if your Aadhaar is linked to your mobile number)
- Lien mark at RTA’s (CAMS / KFintech) portal through One-Time Password (OTP) authentication
- Verify your bank account online via e-mandate
- Read & sign loan agreement online
- Your overdraft facility is ready
How does loan against mutual funds work? Some Pointers
- Limits You can take digital loans against Mutual Funds for certain Limits of your mutual fund holding.
- a The loan amount from MF holding depends on the type of mutual fund ( equity or debt) and the company from where you take a loan
- Loan amount disbursal- Each company has their upper limit for the amount of loan Which means the maximum amount of loan you can take differs from company to company.
- Not all bank provide Loan against MF – Only a few selected banks and institutions provide this facility.
- Not all MF schemes are approved for Loan-Only a selected list of mutual funds can fetch you a loan.
- You will continue to earn returns on your pledged mf units –
- The best thing about a loan against MF is that you continue to earn returns on your pledged mf units. Your mutual fund holdings are pledged to get a loan.
- Since these loans are secured loans ( you pledge your MF holding), they are cheaper than PL and credit cards.
Loan against Mutual Funds Interest rate
The interest rate of loans differs from company to company. But it is lower than most personal loans and credit card loans.
Pros/Benefits of taking a loan against mutual funds
- You do not need to sell your mutual fund units. Instead, you can take a loan against it at a nominal cost.
- Lower interest rate- you pay a lower interest rate as compared to PL and credit card.
- Quick disbursement- The loan application process is very simple and one can take a loan instantly.
- Pay interest on the Used amount only – You might get a highly sanctioned amount. But you have to pay interest on the used amount only.
- Source of Short term money need – One can avail money without selling mf units.
Cons/Disadvantages of mutual fund Loan
a burdenYou need to pay a Loan against the mutual fund interest rate somewhere between 9%-10% per annum. Also, there is an additional burden on the mind for payment of the loan amount.
Loan Against Securities – Disbursement Banks & Companies
- Bajaj Finserve
- HDFC Bank
- ICICI bank – insta loan
- SBI bank
- Mirae Asset Financial Services
- Smallcase
- Mycams
- Dhanlap
- Bank of Baroda
Conclusion
One might be surprised why one can take out a loan against mutual funds when one can easily sell mutual funds and get money.
There are a few aspects of it – This loan is instant. Within a few minutes, you can take a loan. Secondly, in a falling market, if you require instant money, then you might have to bear huge losses. At this time one should use this mutual fund loan facility, to avoid losses in a short span. But if the market is bullish then it’s better to redeem mutual funds and use the money.
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