A safe alternative to get you through your financial emergencies
Life is full of uncertainty, and an emergency can knock on the door at any time. But, it isn’t always possible to be prepared for all the kinds of financial emergencies that might crop up. That is why many people choose to invest in liquid investment avenues such as mutual funds.
When faced with a financial emergency, you could be inclined to redeem your mutual fund holdings, but it isn’t advisable. Redeeming your long-term mutual fund holdings will derail your financial plan and hinder accomplishing your financial goals. This is where Loan Against Mutual Funds can come to the rescue when you’re in urgent need of money. You can avail of a Loan Against Mutual Funds almost instantly and the best part is, you get to retain your mutual fund investments. Sounds interesting, doesn’t it?
Read on to know more about Loan Against Mutual Funds, how it works and how you can instantly avail of it in times of need.
What is a Loan Against Mutual Funds?
Basically, it is a type of loan against the securities you have that gives you the flexibility to access money in case of an emergency without having to redeem or sell your securities, in this case your mutual fund investments.
Loan Against Mutual Funds today are offered by numerous banks and Non-Banking Financial Companies (NBFCs) offline as well as online. It enables you to take advantage of your mutual fund investments by pledging them to the bank or NBFC to get a line of credit. The value of the loan you can obtain is offered based on the value of units held in your folio and the loan tenure.
Since the mutual fund units are offered as collateral, redeeming the units pledged is not permitted unless you repay the loan in full. In case, you have ongoing SIPs (Systematic Investment Plans), your ensuing SIPs are not interrupted in the process.
To get a better idea, let’s look at the critical aspects of Loan Against Mutual Funds…
It is essential to know that not all banks and NBFCs accept mutual funds managed by all the asset management companies (AMCs). Many leading banks accept only the fund houses registered with Computer Age Management Solutions Private Limited (CAMS) — — India’s largest mutual fund transfer agency.
Lien on Mutual Funds
It is vital to know how the lien on mutual fund units works. You have to approach the fund house to get a lien on mutual fund units in your lender’s name. You need to submit the application form and provide details like folio number, scheme name, number of units, etc.
You see, by marking a lien on mutual fund units in the name of the bank or NBFC, you grant them permission or the right to sell or hold the units in case of default in repayment of the loan and/or for margin purposes. But while the lien on units is marked in the lender’s name, you, the investor, continue to benefit from the dividends and notional returns earned on the mutual fund units you’ve pledged.
The margin requirement on units
Margin is the percentage of loan amount offered against the Net Asset Value (NAV) of the share. Most banks and NBFCs usually offer loan amounts up to 50% of the NAV in the case of equity mutual funds, and up to 80% of the NAV in the case of debt mutual funds. That said, this margin varies from lender to lender. Some banks and NBFCs have a cap on the minimum and maximum loan amount they can offer. And at the time of processing the loan, lenders levy a small processing fee.
Since a Loan Against Mutual Fund is a secured loan, the interest rate is lower than the personal loan. It is generally in the range of 10% to 12% and charged only on the amount you use and for the period it is used, i.e. on a pro-rata basis. Note that banks offer Loan Against Mutual Funds as an overdraft facility, and you can use the amount up to the sanctioned limit.
What are the benefits of availing a Loan Against Mutual Funds?
- You don’t have to liquidate or redeem your mutual fund units, and hence the planning for your long-term financial goals is uninterrupted.
- Your SIP instalments continue, thereby not getting in the way of wealth creation.
- The loan can be availed either offline or online.
- The application process is fairly simple compared to other loans.
- Compared to other types of loans, the approval and disbursement process is quick.
- It serves as a useful means of credit, particularly when you do not have a credit history.
- The rate of interest charged on this type of loan is much lower than on a personal loan (an unsecured loan).
- There is no system of EMIs; you can pay at your convenience during the loan tenure.
- No charges are levied for prepayments.
When should you apply for a Loan Against Mutual Funds?
Well, when you are in urgent need of money and looking for a cheaper line of credit, it makes sense to consider availing of a Loan Against Mutual Funds as opposed to liquidating your investments or discontinuing SIPs.
As long as you are using the money for legitimate purposes, there is no restriction to avail of a Loan Against Mutual Funds. However, you must decide whether it is the right time to avail of the loan or redeem the mutual funds. It is advisable to borrow amid falling market conditions to avoid the loss that you may incur in selling mutual fund units at a lower price. On the other hand, redeeming the funds may be a better choice when the market is at its peak and you’ve generated wealth.
How to apply for a Loan Against Mutual Fund?
Here are general steps to apply for Loan Against Mutual Funds online:
Visit the official website of the bank or NBFC you would like to borrow from. Every bank and/or NBFC could follow a slightly different process.
DhanLAP powered by Ark Neo Finance helps you get Loan Against Mutual Funds within 15 minutes. All you have to do is sign-up for free, share your personal details (name, address, age, contact numbers etc.), submit your documents (a Consolidated Account Statement of your mutual fund portfolio), choose the investments you wish to mark a lien on, check the terms & conditions, and you receive the money digitally. It is as simple as that; seamless and no tedious paperwork involved.
DhanLAP is run by an experienced team of individuals who have won laurels in the Indian Fintech space. You can be assured of the privacy/security of your data and the safest possible experience online. Ark Neo’s vision is to provide customers with the most efficient way of managing their assets to get more out of them.
When and how to close a Loan Against Mutual Fund?
On diligent repayment of the loan in full, the fund house removes the lien on your mutual fund units on request from the lender. Once the lien is removed, you can have full access to your mutual fund investments. Many lenders allow part-payment of loans. In that case, the lender will free up some units depending on the amount you’ve partly paid.
And if you’re unable to repay the loan, the lender requests the fund house to redeem the mutual fund units and receives the outstanding dues out of the redemption proceeds.
In case of a financial emergency, Loan Against Mutual Funds can be the best choice because you pay a lower interest rate without liquidating your mutual fund portfolio. These days due to an increased awareness by the banks and NBFCs, Loan Against Mutual Funds has become a popular choice of credit. That said, before you avail of a Loan Against Mutual Funds, carefully evaluate the purpose for which you need the money, how you plan to repay, and make sure you thoroughly read all the terms and conditions.
This article has been authored by PersonalFN — a Mumbai based Financial Planning and Mutual Fund research firm known for offering unbiased and honest opinions on investing.