Mutual funds have recently become a popular investment option due to their potential for higher returns. However, can you also take a loan against mutual funds as collateral? Here are 10 things you need to know about loans against mutual funds.
1. What is a loan against mutual funds?
A loan against mutual funds is taking a loan from a financial institution by pledging your fund units as collateral.
2. What is the loan amount that can be availed?
The loan amount that can be availed against mutual funds varies between 50% to 85% of the mutual fund units' net asset value (NAV). It depends on the financial institution's policy and the type of mutual fund scheme.
3. Which mutual funds are eligible for a loan?
Equity, debt, and hybrid funds are eligible for a loan against mutual funds. However, checking with your financial institution is essential to ensure that your mutual fund scheme is suitable for a loan.
4. What is the loan tenure?
The loan tenure against mutual funds is usually between 1 to 5 years. However, some financial institutions may have different loan tenure policies.
5. What is the interest rate for a loan against mutual funds?
The interest rate is usually lower than other loans, such as personal loans. However, the mutual fund interest rate varies from one financial institution to another and ranges between 9% to 12%.
6. What are the fees for a loan against mutual funds?
The fees for a loan against mutual funds vary between financial institutions. It includes processing fees, prepayment charges, and other charges that may be applicable.
7. Can you continue to invest in the mutual fund scheme after taking a loan against it?
Yes, you can continue to invest in the mutual fund scheme after taking a loan against it. However, the number of units pledged as collateral will be reduced by the number of units equivalent to the loan amount.
8. What happens if the borrower defaults on the loan?
If the borrower defaults on the loan, the financial institution will have the right to sell the mutual fund units pledged as collateral to recover the loan amount.
9. What are the advantages of a loan against mutual funds?
A loan against mutual funds offers lower interest rates than other loans. It also provides liquidity without having to sell the mutual fund units, which can result in capital gains tax.
10. What are the disadvantages of a loan against mutual funds?
A loan against mutual funds risks losing the fund units if the borrower defaults. Therefore, it also reduces the number of units held, which can affect the returns generated by the mutual fund scheme.
Conclusion
A loan against mutual funds can be an excellent way to access liquidity without selling your mutual fund units. However, it is essential to understand the terms and conditions, fees, and associated charges before availing of the loan. It is also crucial to ensure you refrain from defaulting on the loan to avoid losing your mutual fund units.