Mutual Fund Loan- In case of sudden need of money, selling mutual funds seems to be an easy way for investors to arrange money. But a big disadvantage of this is that it can derail long term financial goals. In such a situation, a simple and easy option is to take a loan against mutual funds. In this, the investor does not need to sell his mutual funds, rather he can mortgage them and get cash. That is, by taking a loan against mutual funds, you can not only fulfill your need, but your investment also remains intact and there is no obstacle in the way of long term wealth creation.
Loan Against Mutual Funds
Loan against mutual fund is a facility where investors can take loan against their mutual fund units. Gaurav Goyal, SEBI registered investment advisor and entrepreneur, says, “Whenever there is shortage of money, especially in short term needs, then loan can be taken against mutual fund holdings. This is a much better option than redeeming your mutual fund units. Investment in mutual funds is usually done keeping in mind long term needs, so redeeming them for short term cash needs is not a good strategy.”
Goyal says, in such situations, taking a loan against mutual fund seems to be a better practical solution. The interest rate on this type of finance option is usually lower than other options like credit card or personal loan, because it is a secured loan which is taken by pledging your mutual fund units.
Benefits of taking loan against mutual funds
Taking a loan against mutual funds is especially beneficial because it allows investors to get money for their needs without having to sell their investments and their investments remain intact with the possibility of growth in the future. BPN Fincap director A K Nigam says that while there are advantages of taking a loan against mutual funds, it also has some disadvantages. Therefore, one should take a loan against mutual funds wisely.
1. Fast processing: The process of loan against mutual fund is much faster than a normal loan. Nowadays, many banks and non-banking financial companies (NBFCs) provide this facility on online platforms, so loan approval and disbursal can happen in a few hours or days.
2. Low interest rate: It is a secured loan as mutual fund units are pledged as collateral. Hence, the interest rate on it is lower than unsecured loans like credit card or personal loan.
3. No need to sell the investment: In this option, you do not need to sell your mutual fund units. This way your investment remains intact and you keep getting the benefit when the market rises. That is, you get cash and the investment remains intact.
4. Can be used anywhere: A loan against mutual funds can be used for any need—such as medical emergencies, children’s fees, business needs, travel, etc. There are no restrictions on where the money can be spent.
5. Ownership remains: Even though you have pledged the units, you still retain ownership of them. You also remain eligible for benefits such as dividends or bonuses (if the plan offers such benefits).
6. Loan limit based on NAV: The amount of loan you will get depends on the net asset value (NAV) of your mutual fund units. Usually 50% to 70% of the loan amount is given based on NAV.
7. Easy prepayment option: In this type of loan, you can repay the entire loan at once without any prepayment penalty. This facility is beneficial for those who need cash only for a short period of time.