During a financial crisis, mutual funds give good returns in the long term, and also it is reliable. One of the merits of a mutual fund is, it can be used as security to get loans from banks. Loan against mutual funds, categorized under loans against securities, is an interesting financial option, but it is slightly ignored. Such a loan taken against either equity or debt-oriented mutual fund schemes could not just supply quick liquidity to the cash-strapped but is also slightly cheaper. It is between 11% and 13% per annum, then an unsecured loan like the personal loan (in the range of 11% and 16% per annum) in most cases.
A loan against mutual funds works as an over the draft facility. Once the borrower pledges his mutual fund units to the lender. The lender attaches a lien on them and the borrower pays interest only on the actual loan amount used. When the loan repayment is completed, the lender will lift the lean and the rightful owner of your mutual fund units is got back. As for the loan amount thresholds, the lenders could offer up to 50% of the Net Asset Value (NAV) of the pledged equity-based funds. As much as 80% of the NAV of the pledged debt funds and fixed maturity plans are subject to minimum and maximum loan amount limits. A lender (private sector bank) launched a digital loan against mutual funds in 2018. It offered such loans in a fully paperless manner.
Interested borrowers only need a savings bank account with that particular bank to begin the process. Currently, only eligible folios with a single holding can be pledged for this specific loan facility. Currently one of the merits of taking a loan against mutual funds is that doing so stops an investor from liquidating his investments at loss during a cash-crunch. A digital loan can be easily disbursed and the investor can go ahead with his investments when also earning his dividends. Anyhow, all mutual fund schemes are eligible for a loan. In advance, the aspiring borrowers must check with the lender and see to it that their mutual funds could be pledged for a loan or not. We can simply redeem your mutual fund units while they are profitable. This option can be at your disposal. This reduces the need for you to borrow. To conclude, before finalizing your decision, ensure you have assessed other charges like the processing fee.
