Representative image. PTI
Most banks and non-banking finance companies (NBFCs) provide loans to individuals, companies, trusts and other entities against mutual fund (MF) investments. MFs are usually medium or long term investments. However, investors can easily avail loans against mutual funds in case of emergencies without having to sell their investments. Getting a loan against a mutual fund has many advantages. For example, the interest rate on the loan is much lower than credit card loans or personal loans. There are two types of loans on mutual funds – secured and unsecured loans. Secured loans refer to loans backed by collateral such as mutual fund investments. Secured loans generally have lower interest rates, but a person may be required to pledge a larger portion of their mutual funds as collateral.
An unsecured loan is a type of loan that is not backed by any collateral. This type of loan is similar to a credit card or personal loan, and is not backed by financial assets owned by the borrower. Therefore, a high rate of interest is paid by the bank.
The credit score and fixed income of the applicant or company determine the eligibility for a loan against mutual funds. A higher credit score allows applicants to negotiate a lower interest rate. Tenure, loan amount and interest rate are decided by banks/financial institutions.
Things to keep in mind when taking a loan on mutual funds
Important documents: While applying for a mutual fund loan, you are required to submit documents such as income proof, identity proof and proof of ownership of mutual fund investments. The investors may need to submit their bank statements, PAN card and other financial documents to the bank.
Loan Terms: Investors should read the terms and conditions of the loan given by the bank carefully before availing the loan. One has to check the loan tenure, interest rate and other charges and calculate the repayment amount. You can compare the offers with other plans to choose the best one.
pledging mutual funds; Investors are required to pledge their mutual funds as collateral with the lender. So the lender has a lien on their mutual funds until the loan is repaid.
loan repayment; One should carefully go through the repayment clauses of any loan on mutual funds. If investors repay part of the loan amount, that share of mutual fund units can be freed from the lien (legal claim) in many cases. You can still get profit from your MF investment after taking loan. If an investor defaults on the loan, the lender can sell the mutual fund investment to recover the loan amount.
It should be noted that a loan against your investment will cause a delay in achieving your financial goals.
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