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Did you know that you could now avail a loan against your mutual fund investments? The loan amount you are eligible for will be determined depending on the value of mutual fund units you pledge as collateral against the loan. The loan process is similar to that of the regular loan against property.
Also, the rate of interest applicable on loan against mutual fund investments depend on various criteria. Since the mutual fund units are used as security against the loan, the interest rate on these loans is comparatively lower than that of the unsecured loans.
In the same line, your credit score would also play a vital role when determining the rate of interest. The higher credit score you have, the lower interest rate the bank or financial institution could charge you.
Investors can avail a loan against their mutual fund investments from any bank or financial institution. One can avail a loan against the equity or hybrid mutual fund units he/she holds by contacting any non-banking financial company (NBFC) or bank. Investors can also apply for the loan online.
Depending on the value of mutual fund units you pledge as security for the loan, the lender will determine the loan amount you are eligible for. Also, the loan amount will range from 50-75% of the prevailing Net Asset Value (NAV) of the mutual fund units pledged.
Also Read: Verify Your KYC Before 28 February to Transact in Mutual Funds
The investors will be required to mark the lien on the mutual fund units pledged against the loan in favour of the financial institution or bank during the application process.
Once the pledged units are marked on the lien, the investor will not be allowed to sell or redeem the mutual fund units until the loan is repaid. Also, the fund ownership will be transferred to the lender during the repayment tenure. Investors can request for the lien to be lifted once the loan has been repaid.
However, if an investor fails to clear the debt within the loan tenure or defaults his/her payments, the bank can choose to redeem the mutual fund units marked as lien earlier.
Many investors are still unaware of the loan against mutual funds facility. So the next time you think of redeeming your mutual fund units prematurely or avail a personal loan to raise emergency funds, avail a loan against your mutual fund investments instead of the conventional instruments.
For any clarifications/feedback on the topic, please contact the writer at viswanathan.v@cleartax.in
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