Financial crunch can occur to any person at any point in time. During such cases an individual look for those assets which can provide him/her instant money. So the best option during such times is to consider loan against mutual fund units.
Loan against mutual funds is one of the most viable options available for instant loan. It can be taken from a bank or a non-banking finance company (NBFC) by guaranteeing your mutual fund units. The major advantage of doing so is that a person’s Systematic Investment Plan (SIP) remains unaffected.
Legalities involved in loan against funds
So before we get into the detail of its procedure and applicability, let’s first understand the basics of these funds. These legalities are termed as Lien, which is a document that gives banks the right to sell the fund or hold it. Hence, when you address a lien in the name of the bank it means you grant the ownership of the fund units to the bank.
Once you understand the basics of Lien, the second step is to know about the application procedure of the above loan. These days many online portals like HDFC, ICICI, SBI etc. quickly sanction such loans if you hold mutual funds in the demat form and have prior permission. In case you have kept these funds in the physical form, a loan agreement with the financier/bank should be in place.
The lender then asks mutual fund registrar like CAMS or Karvy to mark a lien on the number of mutual funds being guaranteed. These registrars then mark the lien and send a letter to the lender with a copy to the borrower confirming the lien. However, a borrower must keep in mind that the lien is marked against the mutual funds and not the amount. So, a person cannot redeem the units before they completely repay the loan.
Financiers typically lend about 60-70% of the value depending upon the mutual fund type.
A borrower has to pay an interest of 10-11% when he/she takes loan against mutual funds. This rate is as per the terms and conditions set by the financier as well as the loan tenure. Loan against mutual funds unit is a secured loan and hence the rate of interest is low as compared to personal loans. Also, if your credit score is good, the interest rate could be even less but solely at the bank manager’s discretion.
Lien on mutual funds-removal process
After a borrower repays the loan amount, he/she can request the banks to remove the lien form the mutual funds. Also if you have partially repaid your loan then too you can ask for the partial removal. In such a situation, some units will be freed while the rest would still be under lien.
In case a borrower becomes a defaulter, then the lien can be reinforced again.
Advantages of loan against mutual funds
- In case you want to take a quick loan, then borrowing against mutual funds is the best option.
- If you think your mutual fund investment is lying idle, then taking loan against them is a good way to increase potential return on your investment as well as quickly raise capital for short-term financial requirements.
- If you opt for a loan against your mutual fund units you would not have to sell your units hence your financial plan and fund ownership remains intact.
- Interest rates on a loan against mutual funds are lower than other personal loans.
So with all such advantages, Loan against mutual funds can be a much better option as compared to other traditional loans.