Emergencies, small or big, can happen anytime and it can happen that one can fall short of money in the short-term. Investing in mutual funds is considered a liquid investment. But, not all funds have a high liquidity. Sometimes investors are not ready to redeem their mutual funds because it would interrupt their financial goals. So what if one can retain their investments in mutual funds but get money from them by way of a loan against mutual fund investment.
Not all banks accept mutual fund investments from all fund houses. For example, HDFC Bank accepts only the fund houses serviced by CAMS. Soon Karvy Computer share will join the list too.
Loan Against Mutual Fund
One can avail a loan against mutual fund investment without redeeming their investments permanently. The existing SIP will also remain unaffected. One can approach a bank or an NBFC and pledge their mutual funds units as a security for the debt. The loan can be availed against equity or hybrid mutual funds. The process is similar to the overdraft facility of the bank. The loan will be given based on the value of the units in the folio and the tenure chosen.
The bank holds the right to sell (lien on mutual funds) the mutual funds in case of default from the borrower. The investor needs to approach the fund’s house to get lien of the mutual fund units on the name of the bank. In case the loan is paid in full the bank will send a request to the fund house to lift the lien. In case of default, the lien will be enforced and the bank will request the fund house to redeem the units and the amount thus received will be used against the loan.
One can get a loan up to 50% of equity funds and 80% of debt funds. It is given as an overdraft facility from the bank. It varies from bank to bank and few banks also have a cap on maximum and minimum loan amount one can apply for.
One can expect an interest of 10-11% on loans against mutual funds. This is much cheaper than credit card loans, personal loans, and unsecured personal loans. The bank manager can reduce the interest rate if you have a good credit score or you are an old loyal customer to the bank.
Benefits of borrowing
- A loan against mutual fund investment means one doesn’t have to redeem any units. So the financial plan is still intact and a loan can be availed against the investment.
- Lower interest rates than personal loans.
- Loan against mutual funds provides instant liquidity as the process can be done online.
When should you take a loan?
A falling market situation is better to take a loan. Instead of redeeming the units at a loss, taking a loan against mutual fund is more beneficial. One can retain the units and when the market recovers the fund’s value will go up. In a bull market where all the funds are in profits, it’s better to sell the units and instead of borrowing. If it is a bull phase, redeem. In a bear phase, borrow. If you need money urgently make sure you borrow wisely.