Is Loan Against Mutual Funds Investment a Good Choice in Emergency?

For many people, investment in mutual funds seems to be a risky decision but they didn’t know that such investment in mutual fund through a lump sum investment or through a systematic investment plan or SIP can also act as an emergency fund for them under financial circumstances. But liquidation of your mutual fund plan is not the only available option to deal with the emergence conditions as one can also avail for a loan against mutual funds at low interest rates. It is really a better option than availing a personal loan from any bank or NBFC at a high interest rate. Here are some terms that you should understand before availing for such loan to avoid any misconceptions after recovery from emergency.

How does it work?

For availing loan against mutual fund investment, you can freely approach a bank or a legitimate non-banking finance company followed by processing your request for a loan. The company will take your request into consideration and will sanction the loan amount on the basis of unit’s value held in your mutual fund account portfolio. You can retain the rightful ownership of your financial instrument once again after repaying the loan to the bank before a deadline.

Understand lien for mutual fund loans

Before availing for mutual fund loans you need make yourself aware of the term ‘lien’. Lien signifies an authority to keep possession of property which belongs to a borrower until a debt owed by him is discharged. While taking loans against your financial instrument from the bank or NBFC, you effectively transfer the right of your funds ownership to your mutual fund house. For requesting a lien transfer to the bank, you need to contact your mutual fund company as it will process your duly signed lien request letter to sanction loan for the units you’re currently holding.

How much loan can one claim against mutual funds?

The amount of money you receive as a loan against your mutual fund holdings is fully dependent on the type of mutual fund you own. Plans like SIP, ELSS funds and other mutual fund options offers different amount on returns to the policy holder after the maturity of the policy. As a borrower, one can get maximum 50% lending on the Net Asset Value of holdings for equity based mutual funds. Also the interest rates for loan against mutual funds are slightly lower which are determined on the weight age of risk in each application.

Other important things to remember before availing loan against mutual funds

Loans against mutual funds are available for debt funds as well as equity funds and are granted to the demander only against the list of approved mutual funds or schemes. In case, you’re unable to repay the loan amount, the bank is authorized to seize your holdings. But there is also a provision for requesting the mutual fund company to redeem your units for repayment of loans to get your holdings back.

Conclusion

Loan against your instrument holding i.e. MF holding is a better option than other loan options. Unfortunately, it is rarely preferred by borrowers as they’re unknown to the benefits offered in such a loan provision. It is better to consult your financial advisor, if you want to raise funds to meet emergence situations in right way with right decision.