We all know that investing in mutual funds can help us create wealth and fulfil our financial objectives, but did you know you can also take a loan against your mutual fund units? So, if you need money to fulfil some urgent financial needs, you no longer have to sell your mutual funds units. The only thing you need to do is take out a loan against your mutual fund units.
Let's understand about taking a loan against your mutual fund units in detail.
A loan might be your only option when you are out of funds during a financial crisis. Now, in the era of FinTechs, you have the option of facilities like buy now pay later, personal loans and credit cards. But in that case, the amount might be limited to a certain extent.
If you have more requirement, you are left with two options.
- You can sell your mutual fund investments
- You can take a loan against your mutual fund units in which you have to pay less interest rate than a personal loan; additionally, you will be earning returns from your investment as well.
It would be a better option to take a loan against mutual funds, as your investments are safe.
Benefits of Taking a Loan against Mutual Funds
Taking a loan against mutual funds can be a handy financial tool to help you make the most of your investments during testing times.
Here are a few benefits:
Lower interest rates
The interest rates charged on loans against mutual funds are usually lower than those charged on personal loans or credit cards. This is because the loan is secured against the mutual fund units, reducing the lender's risk.
For instance, if the interest rate on loan against a mutual fund for one year is around 11-12%, then the interest rate on a personal loan can be anywhere above 15-17%.
Therefore, if you need funds for a short-term period, taking a loan against mutual funds can be a cost-effective option.
Quick loan approvals
Applying for a loan against mutual funds is a simple process. Unlike traditional loans, you do not need to go through a lengthy application process, and the loan is approved much faster. Once you have submitted the required documents and collateral, the loan can be approved within a few minutes.
No credit score requirements
Unlike traditional loans, where lenders check your credit score before approving the loan, loans against mutual funds do not have any credit score requirements. It means you can still get a loan against your mutual fund units even with a low credit score. It can also be a great option for individuals with no credit history.
However, in the case of traditional banks, you must have required credit scores to qualify for the eligibility criteria of getting a loan.
Keep your investment safe
Imagine if you have applied for a loan and the bank has disapproved your loan request. In that case, you might be tempted to break your investments. But, with loans against mutual funds, your investments remain safe and will continue to generate returns.
And, with the loan amount, you can take care of your requirements and pay it back at regular intervals.
As a result, your investments tagged to your financial goals remains safe, and you don’t have to compromise on your goals.
Fewer terms and conditions
Lenders have relaxed terms and conditions as loans against mutual funds are backed by collaterals. They also offer flexible repayment options on loans against mutual funds. You can choose to repay the loan in EMIs or Pay only monthly interest while you pay the principal amount at the end of the tenure. This flexibility allows you to choose a repayment option that suits your financial situation.
Conclusion
We always advise our investors to have a significant amount of money in their emergency fund to cope with any financial emergencies. However, if you still need to redeem your mutual fund investments assigned for other goals, we suggest you take a loan against your mutual fund units.
