People invest in mutual funds to accumulate money over the years. However, not everybody is aware that you can take a loan against mf as well when you require immediate money. The million-dollar question is, is it a wise decision? Let us see how it works and whether it’s a good decision for you.
What Is a Loan Against Mutual Funds?
This is a loan you obtain by keeping your mutual fund units as collateral with the lender or bank. You do not need to sell your investments. You remain the owner. But until the loan is repaid, the lender has a right to the units.
It’s similar to availing a loan against gold or fixed deposit. The amount of your loan will be based on the market value of your mutual funds at present.
How Much Loan Can You Get?
The amount of the loan typically depends on:
- The nature of mutual funds (equity or debt)
- The worth of your holdings
- The lender’s policy
- For equity mutual funds, you can avail up to 50%–60 % of the present value.
For debt mutual funds, you can receive up to 70%–80 %.
For instance, if your fund value is ₹1,00,000, you can receive ₹50,000 to ₹80,000 as a loan.
What Are the Interest Rates?
Interest rates on loans against mutual funds are lower than on personal loans. They typically vary between 8% to 12% per annum, depending on the lender and loan size.
This is less expensive than credit cards or unsecured personal loans, where the interest can be as high as 20%–30%.
Advantages of Borrowing Against Mutual Funds
Here’s why most people find it a good idea:
- You Retain Your Investment
You don’t need to sell your mutual funds. So, your long-term returns remain intact.
- Lower Interest Rates
As it’s a secured loan, the interest is typically lower.
- Easy and Quick
You can apply online through personal loan app. If your mutual funds are demat held, the process is even quicker.
- No Prepayment Charges
Most lenders permit you to repay early without additional charges.
Things to Be Careful About
Though it sounds good, there are some points you should keep in mind:
- If the market crashes, the value of your mutual funds could fall.
- The lender can request additional funds or dispose of your units if the value drops too low.
- You need to repay in time. Otherwise, your investments will be sold in order to retrieve the loan.
Not all mutual fund types are considered. Sector funds or new schemes are often declined by lenders.
When Is It a Wise Decision?
It makes sense to take a loan against mutual funds when:
- You require immediate money for a limited period
- You don’t want to disrupt your long-term investments.
- You have a fixed income to pay on time.
- You are getting less interest than other loans.
A mutual fund loan can be a great choice if utilised properly. You retain your investment, get quick money, and pay less interest. But be cautious of market risks and repay on time always.
Ask your bank or NBFC. Compare terms, and borrow as much as you need.