Loan Against Mutual Funds: A Quick Guide
Mutual funds are popular investment options for those who seek to grow their wealth. Apart from earning dividends and capital appreciation, mutual funds also offer an opportunity for investors to avail loans against their holdings. This feature is called ‘loan against mutual funds,’ and it provides a convenient way for investors to access funds without liquidating their holdings. In this blog, we will discuss the concept of loan against mutual funds and its various aspects.
What is a Loan Against Mutual Funds?
A loan against mutual funds is a type of loan that allows an investor to borrow money against the value of their mutual fund holdings. The loan amount is usually a percentage of the total value of the mutual fund units held by the investor. The loan amount can be used for any purpose, such as paying for medical emergencies, funding education, or buying a new house.
How does it Work?
To avail a loan against mutual funds, an investor has to pledge their mutual fund units as collateral to the lender. The lender then evaluates the mutual fund’s value and offers a loan amount, which is typically between 50% to 70% of the mutual fund’s net asset value (NAV). The loan amount can vary depending on the lender’s policies, the mutual fund’s performance, and the investor’s creditworthiness.
Interest Rates and Repayment
Loan against mutual funds typically come with lower interest rates than unsecured loans, such as personal loans or credit cards. The interest rate for a loan against mutual funds can range from 9% to 12%, depending on the lender and the loan tenure. The loan tenure can range from 1 year to 5 years, and the interest is charged on a monthly or quarterly basis.
The repayment of the loan can be done in two ways: either by paying the interest during the loan tenure and the principal amount at the end of the tenure or by paying both the interest and principal amount during the loan tenure. The repayment option depends on the lender’s policies and the borrower’s preference.
Advantages of Loan Against Mutual Funds
There are several advantages of availing a loan against mutual funds, such as:
No Need to Sell Mutual Fund Units: One of the most significant advantages of a loan against mutual funds is that it allows investors to access funds without selling their mutual fund units. This way, investors can continue to earn returns on their mutual fund investments while meeting their financial needs.
Lower Interest Rates: Loan against mutual funds typically come with lower interest rates than unsecured loans, making them a cost-effective option for borrowers.
Quick Disbursal: Loan against mutual funds has a quick approval and disbursal process, making it an attractive option for those who need funds urgently.
No Prepayment Penalty: Some lenders do not charge prepayment penalties on loan against mutual funds. This means that borrowers can prepay the loan amount without incurring any additional charges.
Disadvantages of Loan Against Mutual Funds
While a loan against mutual funds offers several advantages, there are also some disadvantages that investors should be aware of, such as:
Risk of Losing Mutual Fund Units: If the borrower fails to repay the loan amount, the lender can sell the pledged mutual fund units to recover the outstanding amount. This can result in the borrower losing their mutual fund units and the potential returns that come with it.
Impact on Mutual Fund Returns: Pledging mutual fund units as collateral can impact the investor’s potential returns, as the value of the mutual fund units can be affected by market fluctuations.
Limited Loan Amount: The loan amount offered against mutual funds is typically lower than other secured loans, such as home loans or car loans.
Conclusion
Loan against mutual funds is a convenient and cost-effective way for investors to access funds without selling their
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Frequently Asked Questions (FAQs)
Q: What is a loan against mutual funds?
A: A loan against mutual funds is a type of loan that allows investors to borrow money against the value of their mutual fund holdings.
Q: How much loan can I get against my mutual fund holdings?
A: The loan amount can vary depending on the lender’s policies, the mutual fund’s performance, and the investor’s creditworthiness. Typically, lenders offer loans between 50% to 70% of the mutual fund’s net asset value (NAV).
Q: What is the interest rate for a loan against mutual funds?
A: The interest rate for a loan against mutual funds can range from 9% to 12%, depending on the lender and the loan tenure.
Q: What is the loan tenure for a loan against mutual funds?
A: The loan tenure can range from 1 year to 5 years, and the interest is charged on a monthly or quarterly basis.
Q: How is the loan against mutual funds repaid?
A: The repayment of the loan can be done in two ways: either by paying the interest during the loan tenure and the principal amount at the end of the tenure or by paying both the interest and principal amount during the loan tenure.
Q: What are the advantages of a loan against mutual funds?
A: The advantages of a loan against mutual funds include no need to sell mutual fund units, lower interest rates, quick disbursal, and no prepayment penalty.
Q: What are the disadvantages of a loan against mutual funds?
A: The disadvantages of a loan against mutual funds include the risk of losing mutual fund units, impact on mutual fund returns, and limited loan amount.
Q: What is the process of availing a loan against mutual funds?
A: To avail a loan against mutual funds, investors have to pledge their mutual fund units as collateral to the lender. The lender then evaluates the mutual fund’s value and offers a loan amount based on their policies.
Q: Can I continue to earn returns on my mutual fund investments if I avail a loan against them?
A: Yes, investors can continue to earn returns on their mutual fund investments while meeting their financial needs by availing a loan against mutual funds.
