When in a dire financial situation, most would instinctively start considering applying for a personal loan or drawing down their savings. But what if the cash you need could come without the requirement of cashing in investments? It is where a loan against mutual funds comes as a brilliant yet understated option for borrowing without perturbing the equilibrium of a portfolio.
Here are five key points you need to know if you thought of a loan against mf.
- Your Mutual Funds Stay Invested
The greatest benefit of this loan is that the mutual funds remain intact. You are essentially pledging the units, not redeeming them. Therefore, while getting the needed liquidity, their mutual fund investments can continue to grow with the market. Hence, if you have faith in your investments’ long-term prospects, you need not liquidate when the market takes a dip to generate a cash flow.
- It’s a Secured Loan But With Less Hassle
Loans against mutual funds offer relatively easy choices compared to conventional secured loans requiring land or gold as collateral. Digital units against collateral make the whole instant personal loan app process very fast with fewer hassles. The seamless digital KYC process and integrations with the fund houses would allow loan applications, approvals, and disbursals in hours instead of days.
- You Can Borrow Based on Fund Type and Value
The amount of loan may vary depending on the category of mutual funds you invested in and, therefore, the net asset value (NAV) applicable to your mutual fund holdings. While equity mutual funds usually offer a lower loan-to-value (LTV) ratio of up to 50%, pure debt funds may lend even higher than 70%. For example, in a case where the debt fund portfolio value is ₹5 lakhs, depending on the lenders, you may walk away with as much as ₹3.5 lakhs in loans.
- Interest Rates Are Competitive
Interest is charged at lower rates owing to this being a secured loan, as compared to unsecured personal loan rates. Hence, it is a cost-effective borrowing option for temporary needs like medical emergencies, education bills, or travel expenses. Interest is generally charged only on the amount drawn; some lenders even offer overdraft-like structures, charging interest only on the drawn amount and not charging on the entire sanctioned limit.
- Timely Repayment is Crucial
During the loan tenure, the mutual fund remains invested and generates returns, but in case of default, the lender is empowered to initiate forceful redemption. An instance of this could be in a situation where the NAV significantly drops, and the LTV ratio dips below the security margin. The lender may thus liquidate part of your portfolio to make up for the shortfall. It is critical to keep track of your repayments and your pledged funds; this could eventually save you from any unforeseen circumstances.
Conclusion: Tap Into Your Investments Without Breaking Them
A loan against mutual funds is an optimal penetration between liquidity, low rates, and the absolute comfort of not disturbing long-term goals. It thus becomes an optimum solution for one looking for a blend of quick cash in hand and long-term growth.
Act now—leverage your mutual fund portfolio without letting go of it, and meet your needs with financial confidence.