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Decoding loans against mutual funds
You can borrow a minimum amount of ₹25,000 and a maximum amount of ₹5 crore, depending on the type of fund and financial institution.
What is it?
Loans against mutual funds, as the name suggests, allow you to borrow by parking your mutual fund investment as collateral. “Since the loan is backed by an asset, interest rates are lower than that of a personal loan and are typically in the range of 10-12% per annum,” said Ankur Choudhary, co-founder and chief investment officer of Goalwise, a mutual fund investment platform. You can borrow a minimum amount of ₹25,000 and a maximum amount of ₹5 crore, depending on the type of fund and financial institution. “You cannot redeem the mutual fund units as long as they are pledged to the bank. Also, the bank can redeem it to recover their dues in case of default,” he added. You will also have to pay a processing fee which can range from 0.25% to 1% of the loan amount.
How does it work?
You can apply for loans against mutual funds through a bank branch or online. Each financial institution will have a list of approved mutual funds against which they will be willing to give loans. “You have to enter into an agreement with the bank and grant ownership of the fund to the bank, which gives the banks the right to sell the fund in case of non-payment of loan,” said Rachit Chawla, founder and chief executive officer of New Delhi-based Finway Capital, a platform for investment advisory and loans. It works as an overdraft account in the sense that you are charged interest only on the amount you use. “The limit of the loan amount is typically up to 50% of the net asset value of the mutual fund units pledged in case of equity and up to 70-80% in case of debt funds,” said Choudhary.
Should you go for it?
If you are in need of money and looking to take a loan, you can consider loan against mutual funds in case of an emergency. “Pledging mutual funds or securities should be the last option,” said Suresh Sadagopan, a Mumbai-based financial planner. This is because mutual funds are subject to market risks and when the market is down, it can pose risks. “Say you have taken a loan of ₹60,000 against a mutual fund corpus of ₹1 lakh. When market is up, both you and financial institution don’t face risk. In case the market goes down and the value of the mutual fund corpus dips to ₹80,000, the bank may ask you to put more money, which is ₹20,000 to make up for the gap or may sell your mutual fund holding,” explains Chawla. Considering loan against mutual funds are secured loan in nature, it is cheap than a personal loan.
