How Mutual Fund Investing Can Assist You in Times of Crisis
A financial plan’s first step should be to prepare for crises. Maintaining a specific amount of money in a savings account or liquid fund may assist in weathering adverse situations. However, the emergency fund may not always be sufficient. Additionally, you may be required to borrow money. And a loan secured by collateral might be beneficial in such a case.
You should be aware that you may get a loan against gold or real estate. However, were you aware that you may borrow against your mutual fund investment? This blog will discuss loans secured by mutual funds.
What exactly is a loan secured by a mutual fund?
A loan secured by a mutual fund is similar to other secured loans. The collateral in this scenario is your mutual fund investment. A financial institution, such as a bank, secures the loan amount against your mutual fund units and disburses it. Once the lien is recorded, the bank acquires possession of your fund units. Bear in mind that the bank has a lien on your mutual fund units, not on the amount invested or the current value of your investment. As a result, once the lien is recorded, you lose access to your units. This implies that you will be unable to redeem those units until the loan is repaid.
And, as with other loans, banks will determine the loan amount based on the number of units, the kind of mutual fund, and the term of the loan.
As you return the debt, the lien is eliminated.
How can I get a loan secured by mutual funds?
Nowadays, most banks, similar to their overdraft option, provide fast loans against mutual funds.
You and the bank will enter into a loan arrangement. The lender directs a mutual fund registrar, such as CAMS or KARVY to secure the pledged units with a lien. The registrar then stamps the lien and sends a letter confirming the claim to the lender, with a copy to the borrower.
Consider the following before to borrowing against your mutual fund units:
Borrow against a variety of mutual fund types, including equity funds, debt funds, and hybrid funds. However, the sort of loan that you may get is determined by the mutual fund. Each bank will have its own set of standards. For example, we may borrow up to 50% of the value of your stock mutual fund and up to 80% of the value of your debt mutual fund.
You will be able to borrow between a minimum and maximum sum against your fund units. This amount will vary across banks.
Banks are not required to provide loans against all mutual funds. Each bank maintains a list of mutual funds that it has authorised. For instance, ICICI Bank provides loans secured by CAMS-registered mutual funds.
The advantages of taking out a loan against a mutual fund
Rather of selling your mutual fund units, a loan secured by the mutual fund may be a preferable choice. The following are some of the benefits of taking out a loan against mutual funds.
Tide over an emergency: You can pledge your mutual fund units and get the money into your bank account right away in an emergency.
Loans against mutual funds: might be a unique solution to meet short-term financial requirements. You may take out a short-term loan against your mutual fund units and repay it over time without jeopardizing your mutual fund unit ownership.
Low interest rate:Loans backed by mutual funds may have lower interest rates than unsecured loans such as personal loans.
Your units remain invested: If you take out a loan against your mutual fund units, you will not be required to liquidate them. Pledged mutual fund units will stay invested and earn returns. This guarantees that your financial strategy and ownership of investments are not jeopardised.
Only pay interest on the utilized amount: When you take loans against mutual funds, you only pay interest on the amount credited to your account and not the total loan amount guaranteed from your mutual funds.
Conclusion:
Even if you have sufficient funds in your bank account, you may need loans for a variety of reasons. This is due to some unforeseen costs that may need a loan. If you invest in mutual funds, you may borrow money against them. This will assist you in meeting financial responsibilities while also guaranteeing that your assets continue to earn a profit.
This blog is only educational in nature and should not be construed as personal advice. Market risks are inherent in mutual funds. Carefully read any scheme-related documentation.
