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Things you should know about loans on mutual funds.

Things you should know about loans on mutual funds.

Photo courtesy Andrea Piacquadio.

Everyone wishes to lead a happy life without stress and tension. But life is unpredictable and no one knows when they will face a medical emergency or there may be a requirement for money for a wedding or for the renovation of the house. An individual would certainly need money in such situations and there are various options available to raise money.  Loan against the mutual fund units is one of them which many people are not aware of.

A person can avail of a loan against the mutual fund units by approaching a bank or a non-banking finance company that will consider the request and pledges the mutual fund units as security. The loan amount would depend on the value of the units in the folio and the time period for which a person wishes to avail of the loan. It also depends on the type of mutual fund they hold. Equity mutual funds can get a loan of 50% of the net asset value of the fund as a loan while for the debt mutual fund it would be around 80%.

There are certain limits to the loan that you can get against the mutual funds; which are the minimum and the maximum limits. In ICICI bank the minimum loan amount is 50,000 and the maximum amount is 20 lakhs in equity mutual funds while it is 5 crore in the case of debt mutual funds. The rate of interest is 10.30% for equity mutual funds and 9.80% for debt mutual funds. For HDFC bank the minimum loan amount a person can get against a mutual fund is Rs 1 lakh while the maximum they can get is Rs. 10 lakhs against equity funds and for debt funds it is Rs 1 crore.

The loan is higher in the case of NBFCs; the minimum and maximum limits are much more. In Aditya Birla Finance the minimum loan amount is Rs 25 lakhs while the maximum loan amount is Rs. 10 crores.

What is a lien on a mutual fund?

You get the loan after the lien marking on the mutual fund units. Lien is the legal right that you provide for the assets against which you borrow money. Basically, by marking the lien on the mutual fund units you are offering the whole or part of the units as collateral for the loan. After the lien mark on the mutual fund units the folio number, numbers of units, and scheme name are entered in the application and the same is forwarded to the mutual fund registrar. Once the lien processing is successful you can borrow money against the units pledged.

The banks and NBFCs don’t accept mutual fund units of all the asset management companies. SBI offers loans against units of the SBI mutual fund only. Other banks accept the fund houses registered with CAMS (Computer Age Management Solutions Private Limited) only. If you have mutual fund schemes that are not there in the list of approved schemes of these leading banks then you can use new-age digital lenders like Dhanlap. They have schemes registered with CAMS as well as KFintech and other RTA providers.

You continue to make returns on the pledged mutual fund units

The mutual fund units that you pledged to take a loan are invested in the market and the mutual fund will only sell them in case you default on the loan payment. As long as you keep paying the loan on time, the mutual fund units remain invested in the market and keep providing returns. This would ensure that you keep moving towards your financial goal and for the short term arrange the money without selling the units.

A loan on mutual fund units is lower than a loan on credit card and personal loans.

The interest rate on a loan against a mutual fund is much lower than the interest rate on a credit card or a personal loan that you take. Interest on a credit card is 30%-40% APA while for a personal loan it is from 10%-24%. The loan on credit cards and personal loans is higher because these are unsecured loans and not backed by the financial asset that you own. So the bank charges you higher for the higher risk it is taking.

On repayment of the loan amount, the lender will send a request to the fund house to remove the lien. The lender can reinforce the lien if the individual fails to pay back the loan in the time duration agreed on. You can get a partial removal of the lien if the lender allows and this would free some of the units called the free units which can be redeemed.

A loan against mutual funds can provide liquidity for the urgent financial requirement that you may have. It is a good way to arrange money for short-term requirements and the interest rates are lower since it is a secured loan. Due to the advancement in technology the banks like HDFC, ICICI, and SBI  provide loans against mutual fund holdings online after you pledge the mutual fund units.  The best part is that you can continue with the SIP which helps in the process of wealth creation and there are no charges on the prepayment of the loan amount.

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