Mutual funds are a great option to invest money and enjoy diversification of assets. Whether you have a low-risk tolerance or a very risky appetite, there are schemes to suit your needs.
Though these are excellent investment avenues, did you know you can also get loans against your MF units? Well, you know it now.
Today we’ll discuss the advantages and disadvantages of taking a loan against mutual funds in India.
What is Loan Against Mutual Funds?
Loans against mutual funds are like an overdraft/loan facility, quite similar to bank loans. You go to a bank or non-banking financial institution and obtain a loan against your mutual fund investments.
Here, your mutual fund units are kept as collateral. Meaning that if you fail to repay the loan amount, you may lose your mutual fund units to the financial institution that had disbursed the loan amount.
The amount you get against pledging your mutual fund units depends on various factors, including the type of your mutual fund (debt or equity), the loan term, the value of MF units, etc.
Your assets will continue to earn returns while you enjoy a loan facility. It is because you’ve pledged your securities and not sold them.
Now let’s have a look at the pros and cons of taking LAMF in brief.
Pros of loans against mutual fund units
Instant liquidity
You don’t have to wait for days for loan approval. You can complete the online application process and get the loan amount credited to your bank account within a few minutes.
Meet your urgent financial requirements
Life is full of ups and downs. We never know what’s going to happen to us the next moment. Unexpected situations can lead to an urgent need for money. For example, you may need money to pay hospital bills.
In such cases, taking a digital loan against mutual funds comes handy. You can get a loan without selling your investments.
Convenient
Convenience is the other main reason to consider taking loans against mutual funds in emergencies. You can apply for a loan in just a few steps from anywhere without any hassles. Also, the entire process is paperless and automated.
Lower interest rates compared to personal loans
It is one of the best things about loans against mutual funds in India. The interest rates you pay on such loans are relatively lower than those you pay on personal loans from banks.
It is because your MF units are kept as collateral for such loans.
You still continue to earn from mutual funds
While you take a loan against your units, ownership of your mutual fund units still remains with you. That means even when you have taken a loan, your investments still continue to generate returns for you.
But you must note that the bank might sell your investments if you’re ineligible to repay the loan amount.
No strict credit score requirements
Since loans against mutual funds are backed by collateral, i.e. your investment units, even a person with a low to moderate credit score can get you a loan. On the other hand, in the case of loans such as personal loans, banks and financial institutions may charge high-interest rates if your credit score is low.
Cons of loans against mutual fund units
Investments liquidated if repayment is not made
Your MF units are kept as collateral while getting the loan. Hence, if you are unable to pay the loan amount on time, the financial institution might sell your pledged units to recover money.
Hence, taking a loan only when you are confident of repaying it on time is advisable.
The loan period is usually short
The tenure to repay the loan is usually shorter than you expect. In such a case, you’ve to consider the loan period, interest rates and other charges while taking a loan. Don’t forget about penalties if you delay repaying the loan amounts.
Final words
Taking a loan against mutual fund units is no doubt a great option. Not only can you avail of quick loans, but also, the ownership of securities remains with you.
But you must be clear with your purpose of taking a loan. It might not be a good idea if you’re taking a loan to buy your favourite bike or car without any proper planning.
But if you need quick money to finance your urgent needs and you are sure about repayment on time, there’s no better option than this.
For bigger goals, like buying a home or a car, you must consider making financial plans for yourself.
