Loans against Mutual Funds
Banks and NBFCs allow individuals to take out loans against various forms of collateral. In other words, when as an asset has significant monetary value, that asset can be used by an individual to avail of a secured loan. Among the various forms of collateral accepted by banks and NBFCs as a means to secure lending and ensure repayment; is mutual funds. By definition, a mutual fund is a collective fund sourced from investors and invested and managed by a financial corporation. For the investor, a mutual fund investment is an asset which can be used as collateral to secure a loan. This article aims to provide factual information pertaining to loans against mutual funds with the objective of serving as a guide for those intending to avail of such loans in the near future. Read further to know more.
The Primary Benefit of Loans against Mutual Funds
As an investor, the need for an emergency supply of funds can come about at any time and for various reasons. Liquidating one’s mutual funds may not be the obvious option to gain access to these funds for various reasons. In such circumstances, a loan against mutual funds can help investors realize and harness the monetary potential of their mutual funds-based assets.
As is always the case with secured loans, the loan amount is determined by the value of collateral offered. The same applies to loans against mutual funds wherein the market value of mutual fund units are assessed and the loan amount signed off on by the bank or the NBFC will be lower than the market value of mutual fund units. This is referred to as the loan ‘margin’ in banking parlance.
Interest Rates of Loans against Mutual Funds
Similar to any other loan, interest is charged on a loan against mutual funds. These interest rates differ from bank to bank or among NBFCs. The rate of interest often varies between 10% to 11%. It is common for lenders to have lower interest rates for secured loans such as loans against mutual funds. It must be noted here that investors have access to a higher margin with equity and balance funds when compared to the margin offered against liquid and debt funds.
Mutual Fund Limbo
Borrowers must also note that their mutual funds are in a state of limbo for the duration of the repayment tenure post taking out a loan against mutual funds. As such, the mutual fund units offered up as collateral are designated as ‘under lien’ as per the books of the collective fund. As a result, an investor cannot sell or redeem these units until and unless the loan against mutual funds is paid in its entirety.
Like all loans, a prerequisite for qualification and loan disbursal is to furnish all relevant documents. As such, when an individual avail of loans against mutual funds, he or she must provide the bank or NBFC with...
In conclusion, loans against mutual funds are readily available and are a smart option for investors in need of funds.