Mutual funds are often medium- or long-term investments, so you can borrow money against them. However, investors can only sell their investments to get loans against mutual funds in times of emergency. Therefore, investors should be aware that taking out a loan against their investment could cause them to take longer to attain their financial objectives. On the other hand, the profits on an unaltered investment may be rather appealing depending on the basket of stocks.
The fact that the interest rate on loan is far lower than that of credit card loans or personal loans is one of the major advantages of taking out a loan against mutual funds. Furthermore, interest rates on debt fund schemes are lower than those on equity fund units.
Prior to applying for a loan against mutual funds, keep the following in mind.
Eligibility
Most banks and non-banking financial companies offer loans against mutual fund investment to investors, firms, trusts, and companies and provide loans to investors, businesses, trusts, companies, and other entities in exchange for mutual fund investments. Minors are not subject to the rule. The minimum age to apply for such loans for private investors is 21.
The applicant's credit score or a reliable source of income are further eligibility requirements. The applicant can bargain for a cheaper interest rate with a higher credit score. The bank or other financial institution determines the loan's size, term, and interest rate.
Secured or unsecured
There are two sorts of loans against mutual funds: secured and unsecured. Collateral, such as your mutual fund holdings, may be utilized as security for a secured loan. Although secured loans often offer lower interest rates, you might be required to put up more of your mutual funds as security.
Any collateral does not support an unsecured loan. In addition, any financial assets do not back these loans that the loan applicants own, making them comparable to credit card loans or personal loans. Banks, therefore, impose a higher interest rate.
Things to Note
Loan terms
Investors who are interested in borrowing money against mutual funds should carefully review the loan terms that the bank is providing. They should determine the payback amount by considering the interest rate, loan term, and other fees. They can also evaluate the offerings from various schemes to get the finest bargain.
Required documents
Investors must provide documentation showing their identification, income, and ownership of their mutual fund investments when asking for a loan secured by such investments. The investor may also be asked to submit copies of their bank statement, PAN card, and other financial records by the banks.
Pledge your mutual funds
Mutual fund pledges from investors are required as security for loans with lenders. Therefore, the lender will have a lien on your mutual funds until the loan is repaid.
Repayment of loan
Investors should carefully compare the loan's repayment terms with the mutual funds. In some circumstances, the lien on a portion of the mutual fund units may be removed if investors repay an amount of the debt. Even if the investor has taken out a loan against their MF investment, dividends can still be earned. Please make timely payments on the loan to prevent the lender from selling your mutual fund investments to recover the loan amount.