For an investor, mutual funds are a method to spread their portfolio across multiple segments and risk profiles. Especially low-risk customers can gain enhanced overall benefits with mutual funds through SIP.
But, did you know that you can also take a loan against mutual funds?
A loan against mutual funds interest rate is usually low, and the time period is short. This type of loan is best for an emergency situation where you need money for a short-term.
Let’s see how you can take a loan against mutual funds.
What Does It Mean to Take a Loan Against Mutual Fund Investment?
Loan on mutual funds means you can gain liquidity almost immediately on your mutual fund units. This is a type of overdraft option, so the tenure of the loan is rather short. However, the major benefit of this type of loan is that you don’t need to sell your mutual fund units or transfer its ownership to the financial institution. The financial institution or the mutual fund’s provider keeps a lien amount on your mutual funds, which safeguards their investment. In a way, offer collateral to the financial institution.
Understanding Lien Amount
While lien amount doesn’t mean that you have sold your mutual funds, it means that the financial institution can sell this fund if you don’t repay the loan money. This means that you are giving the financial institution ownership to sell or use this fund to recover any losses.
To allow the financial institution to keep your fund as a lien with them, you need to request your fund house to make this transfer of ownership.
Note: You can’t withdraw your funds or use this fund in any manner until it is a lien amount to the financial institution.
How Much Loan Amount Against Mutual Funds Can You Take?
It depends on the type of mutual fund you hold.
If you have purchased an equity fund, then you may receive only 50% of your Net Asset Value. This is because an equity fund is quite volatile, and its value may drop considerably if the stock market goes down. So, you can only get 50% and sometimes, even less loan on mutual funds of the equity market.
If you have purchased a debt fund, then you can get more than 50% of your NAV.
However, most of the time, the lending organization or the financial institution decides the amount they want to lend on your mutual fund units. The maximum amount you can get is INR 20,00,000, and the minimum amount is INR 1,00,000*.
Further, it is necessary to note that the financial institution will only offer you a loan if you have already completed the minimum lock-in as per your policy documents. Before that, you can’t take a loan against mutual funds. Even the Mutual Fund provider won’t agree to the lien amount before the lock-in period ends.
Documents Required for Availing Loan Against Mutual Fund:
These are the following documents required by any financial institution for taking a loan against mutual funds:
- Identity proof- PAN card, AAdhar card, Voter id, Driving license, Ration card
- Address proof- Voter id, Passport, utility bills
- Signature proof
- Latest Photograph
- Cancelled cheque
- Account statement
- Complete application form
What is Loan Against Mutual Fund’s Interest Rate?
There are two factors that contribute to the loan against the mutual fund’s interest rate.
- Since it is a secured loan, its interest rate is lower when you compare it with a personal loan or unsecured loans. So, you can get a loan at 10-11% depending upon your mutual funds’ units.
- Secondly, if you have a good credit score and a nice reputation with the financial institution, you can get an even lower interest rate than mentioned above.
Usually, there is no fixed tenure in mutual funds loan till which you need to keep paying interest even when you have paid the principal amount. But, read Mutual Fund documents to understand this.
Hence, at last we can say that loan against mutual funds is an easy option to fulfil your emergency requirements without taking any unsecured loan. Just talk to your financial institution, transfer the lien rights to the financial institution, and receive the loan amount in 2-5 days only.