Mutual funds are a popular investment option for individuals who want to grow their wealth over the long term. However, did you know that you can also avail loans on your mutual fund investments? Yes, you heard it right! Loans on mutual funds are a great way to access liquidity without liquidating your investments. In this blog, we will help you understand loans on mutual funds in detail.
What is a Loan on Mutual Funds?
A loan on mutual funds is a type of loan where the borrower pledges their mutual fund units as collateral to the lender. The lender, in turn, provides a loan against the pledged mutual fund units. The loan amount is generally a percentage of the net asset value (NAV) of the mutual fund units pledged as collateral. The loan amount, interest rate, and repayment tenure depend on the lender’s policies and the borrower’s creditworthiness.
Benefits of Loans on Mutual Funds
- Liquidity: Loans on mutual funds provide liquidity to the borrowers without having to sell their investments. This way, the borrowers can meet their financial needs while continuing to benefit from the growth potential of their mutual fund investments.
- Lower Interest Rates: Loans on mutual funds typically have lower interest rates compared to unsecured loans, such as personal loans or credit cards, as mutual funds serve as collateral.
- Easy Application Process: Loans on mutual funds have a simple application process, and the disbursal is usually quick as the collateral is already in place.
- No Need for a Guarantor: Loans on mutual funds do not require a guarantor, which makes it easier for individuals to avail of loans.
Things to Consider Before Availing a Loan on Mutual Funds
- Interest Rate: The interest rate charged on a loan on mutual funds varies from lender to lender. Therefore, it is essential to compare the interest rates offered by different lenders before availing the loan.
- Loan to Value Ratio (LTV): LTV is the percentage of the mutual fund units’ NAV that can be borrowed. The LTV varies from lender to lender and can range from 50% to 90% of the NAV. It is crucial to check the LTV ratio before availing of the loan.
- Repayment Tenure: The repayment tenure for a loan on mutual funds varies from lender to lender. It is crucial to choose a repayment tenure that suits your financial situation.
- Risk of Default: If the borrower fails to repay the loan, the lender can sell the pledged mutual fund units to recover the loan amount. Therefore, it is essential to assess your ability to repay the loan before availing it.
Conclusion
Loans on mutual funds are an excellent option for individuals who want to access liquidity without liquidating their mutual fund investments. They offer lower interest rates and easy application processes. However, borrowers must consider the interest rate, LTV, repayment tenure, and risk of default before availing the loan. It is advisable to consult a financial advisor before availing a loan on mutual funds to ensure that it aligns with your financial goals and objectives.
Read more useful content:
- How to invest in mutual funds
- All about mutual funds-types & importance
- The Power of SIP Investment in Mutual Funds
Frequently Asked Questions (FAQs)
Q: What is a loan on mutual funds?
A: A loan on mutual funds is a type of loan where the borrower pledges their mutual fund units as collateral to the lender and receives a loan against the pledged mutual fund units.
Q: What is the loan amount that can be availed against mutual fund units?
A: The loan amount is generally a percentage of the net asset value (NAV) of the mutual fund units pledged as collateral. The loan amount, interest rate, and repayment tenure depend on the lender’s policies and the borrower’s creditworthiness.
Q: What is the interest rate charged on loans on mutual funds?
A: The interest rate charged on loans on mutual funds varies from lender to lender. It is crucial to compare the interest rates offered by different lenders before availing the loan.
Q: What is the repayment tenure for a loan on mutual funds?
A: The repayment tenure for a loan on mutual funds varies from lender to lender. It is essential to choose a repayment tenure that suits your financial situation.
Q: What is the Loan to Value (LTV) ratio in a loan on mutual funds?
A: LTV is the percentage of the mutual fund units’ NAV that can be borrowed. The LTV varies from lender to lender and can range from 50% to 90% of the NAV. It is crucial to check the LTV ratio before availing the loan.
Q: What are the benefits of loans on mutual funds?
A: Loans on mutual funds provide liquidity without having to sell the mutual fund investments, have lower interest rates compared to unsecured loans, have a simple application process, and do not require a guarantor.
Q: What are the risks associated with loans on mutual funds?
A: If the borrower fails to repay the loan, the lender can sell the pledged mutual fund units to recover the loan amount. Therefore, borrowers must assess their ability to repay the loan before availing it.
Q: Can I avail of a loan on any mutual fund investment?
A: Not all mutual fund schemes may be eligible for a loan. You need to check with the lender which mutual fund schemes are eligible for availing loans.
Q: Can I continue to invest in the same mutual fund scheme if I have pledged it for a loan? A: Yes, you can continue to invest in the same mutual fund scheme if you have pledged it for a loan, but the loan amount will be deducted from the available units.
Q: Do I need a good credit score to avail of a loan on mutual funds?
A: Yes, having a good credit score is essential to avail of a loan on mutual funds as it demonstrates your creditworthiness and ability to repay the loan.
