Mutual funds are among the most sought-after investment avenues today in India. They are used by many to save for long-term needs, accumulate wealth, or save for retirement. But what if one finds oneself in a situation where one must get some money instantly? It may not be wise to break the mutual fund investment. This is where a loan against mutual funds can be useful.
This personal loan enables you to borrow against your mutual fund holdings as collateral. You don’t have to liquidate your investments, and you can still take advantage of market appreciation while addressing your immediate requirements. Let’s see how it works and why it might be beneficial for you.
What Is a Loan Against Mutual Funds?
A mutual fund loan is a secured loan. Rather than using gold or property as security, you use your mutual fund units as security. Your units are kept by the lender as security, and a loan is extended to you at their market value.
You can avail of this loan against mutual fund for personal purposes, business purposes, or any other emergency. It’s easy, and the process is generally quicker than for regular loans since the risk to the lender is lower.
How Much Can You Borrow?
The sum you can borrow will vary based on the value of your holdings in a mutual fund and the kind of fund. Generally:
- For equity mutual funds, you might receive as much as 50–60% of the value.
- For mutual funds in debt, you will receive about 70–80% of the amount.
Based on the type of mutual funds you have, you could get a loan of ₹2.5 lakhs to ₹4 lakhs if you have them.
How does the loan process happen?
In this simple way the loan process normally works:
- Check if you are eligible. You can submit the personal loan required documents online or by calling the store of most banks and other financial agencies.
- Pledge of mutual fund units: You fill out a form and give permission for your units to be considered committed.
- Loan acceptance and payment: Once everything is confirmed, the loan is approved and the money is taken out of your account, typically within a few days.
- Payment: You pay back the loan amount plus interest. Some companies offer an overdraft service, while others offer a one-time payment.
You are the owner of the mutual fund units during the loan term, but you cannot sell or redeem them until the loan is returned.
Advantages of Loans Against Mutual Funds
- Do not break your investment: You do not have to sell your mutual funds for less than what they are worth or give up market gains.
- Less expensive interest rates: Because it is a security loan, the interest rates are not as high as on personal loans or credit cards.
- Easy to get your money: If your mutual funds are demat and on well-known sites, the process is usually quick.
You can use the money for anything, like vacation, school, work, or medical bills.
Do not sell your assets if you need cash fast and have mutual funds. Instead, think about having a loan against them. It is a smart way to deal with short-term cash flow issues without giving up long-term growth.
You ought to read the terms, compare lenders, and ensure that the loan is ideal for you before you move your money. If you plan ahead, this can help you keep track of your cash and get cash fast.