Looking for a loan? Did you know that you can pledge your Mutual Fund units as collateral for a loan? Yes, you can. Here are all the details.
Mutual Funds are among the most-loved investment products in India. They are considered safe, convenient, and are affordable. However, most often, Mutual Funds are among the last avenues for those seeking loans against security. The fact is that Mutual Funds can also help you get a loan against them from any bank or financial institution, just like a loan against Fixed Deposit.
In this article, we will discuss ways to take a loan against Mutual Funds. We will also give you some important points you need to be aware of.
How a loan against Mutual Fund works
Mutual Funds are assets in your name. Just like you can get a loan against other assets, you can get a loan against Mutual Funds from banks and financial institutions. Here is how it works. The investor applies to the bank or financial institution for a loan against the Mutual Fund units he or she holds. The lender does the due diligence, which involves research on your Credit Score, assessing the value of your units, and determining your loan amount eligibility based on these.
The loan amount largely depends on the value of the Mutual Fund units to be used against the loan. Usually, the amount sanctioned is about 60-70% of the value of the Mutual Fund units pledged at the time of applying for the loan. The lender will then put a lien on the Mutual Fund units thus pledged. The lien is a right given to the financial institutions to sell and recover the loan amount in case the borrower defaults on the repayment. Obviously, when a lien is marked on the Mutual Fund units, the investor cannot sell them.
Once the loan is sanctioned, the borrower has to inform the registrar about the lien on the Mutual Fund units for the loan extended to him. The details include the Mutual Fund name, the number of units pledged with the lender, and the bank name. The investor has to repay the loan at the interest rate decided at the time of applying for the loan. This has to be done within the loan tenure. Once the loan is repaid by the borrower, the lender has to inform the Mutual Fund house to remove the lien on the units. Once this happens, the investor is free to sell the units held. The lender can also request the fund to remove the lien on a part of the Mutual Fund portfolio after the investor has repaid a certain amount of the loan. These units can then be sold in the market.
Check This: What To Remember When Investing In Mutual Funds
Important points for borrowers
First, you can only pledge those Mutual Fund units that do not have any lock-in period, i.e. units that you are free to transact with. What does this mean? Mutual Funds with a lock-in period, such as tax saving Mutual Funds or ELSS, cannot be used to get a loan.
While it is tempting and easy to use your Mutual Fund units to avail a loan, it is advisable to do this only if it is necessary. Using the loan to buy luxury goods or take a vacation should be avoided. Mutual Fund investments are made for the long run and for your future. Pledging it to get a loan for discretionary purchases is equivalent to sacrificing your future security for temporary entertainment. If you default on the loan, you will lose your investment.
Additional Reading: How To Avail Paperless Personal Loans
Finally, you should look at other ways of arranging a loan if you need money. You can try to borrow from friends and family members or loan against Fixed Deposit. These will be cheaper. You can also consider Personal Loans from banks. You will not be required to pledge an asset as security when you take a Personal Loan. Many Personal Loan offers are available without the need to provide collateral. We have plenty of them.