Mutual funds are an excellent way to invest in the stock market without the need for extensive knowledge or experience in investing. With mutual funds, investors can pool their money and access a diversified portfolio of stocks and bonds, managed by a professional fund manager.
However, what many investors do not know is that they can also use their mutual funds as collateral to obtain a loan. In this article, we will explore how you can unlock the power of investments and get a loan against mutual funds.
What is a loan against mutual funds?
A loan against mutual funds, also known as a margin loan, is a type of loan where the mutual fund units are pledged as collateral to the lender. The loan amount is typically a percentage of the current market value of the mutual fund units, which can vary from lender to lender. The interest rate on the loan is usually lower than the interest rate on personal loans or credit cards because the mutual fund units provide security to the lender.
How to get a loan against mutual funds?
The process of obtaining a loan against mutual funds is relatively straightforward. Here are the steps you need to follow:
Step 1: Check the eligibility criteria – Before applying for a loan against mutual funds, you need to check the eligibility criteria set by the lender. The criteria may vary from lender to lender, but some common requirements include a minimum age limit, a minimum number of mutual fund units, and a minimum value of the mutual fund units.
Step 2: Select a lender – There are several banks and non-banking financial institutions (NBFCs) that offer loans against mutual funds. You should compare the interest rates and terms and conditions offered by different lenders and select the one that suits your needs.
Step 3: Submit the application – Once you have selected a lender, you need to fill in the application form and provide the required documents. The documents required may include KYC documents, mutual fund statements, income proof, and bank statements.
Step 4: Pledge the mutual fund units – After the lender approves your loan application, you need to pledge the mutual fund units as collateral. The lender will mark a lien on the mutual fund units, which means that you cannot sell or redeem the units until you repay the loan.
Step 5: Receive the loan amount – Once you pledge the mutual fund units, the lender will disburse the loan amount to your bank account. You can use the loan amount for any purpose, such as funding your child’s education, starting a business, or paying off high-interest debt.
Benefits of a loan against mutual funds
Lower interest rates – Since the mutual fund units provide security to the lender, the interest rate on the loan is usually lower than the interest rate on personal loans or credit cards.
Quick disbursement – The process of obtaining a loan against mutual funds is quick and hassle-free, and you can receive the loan amount within a few days of submitting the application.
No need to liquidate investments – When you take a loan against mutual funds, you do not need to sell or redeem your investments. This means that you can continue to earn returns on your investments while also meeting your financial needs.
Flexible repayment options – Most lenders offer flexible repayment options, such as EMI (Equated Monthly Installments) or bullet repayment, which allows you to repay the loan in one go at the end of the loan tenure.
No impact on credit score – When you take a loan against mutual funds, it does not impact your credit score because it is not considered a default or a missed payment.
Conclusion
A loan against mutual funds can be an excellent way to access funds quickly and at a lower interest rate than other types of loans. However, it is essential to remember that the mutual fund units are pledged as collateral, which means that if you are unable to repay the loan, the lender can sell the mutual fund units to recover the loan amount.
Therefore, it is crucial to borrow only what you need and ensure that you can repay the loan on time. With proper planning and responsible borrowing, a loan against mutual funds can help you meet your financial needs without sacrificing your long-term investment goals.