What is the Advantage of Borrowing Against Mutual Fund Units?

When you need immediate cash, the first thought might be to sell off investments. However, there’s a more efficient method for obtaining liquidity without having to disrupt your long-term financial plans: borrowing against your mutual fund units. This method allows you to leverage your investments in equity or hybrid mutual funds to meet short-term financial needs, without the need to sell your assets. This article will explore the process, costs, advantages, and implications of taking out a loan against mutual funds.

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How to Get a Loan Against Your Mutual Funds?

Obtaining a loan against mutual fund units is a straightforward process. You can apply for a loan from banks or Non-Banking Financial Companies (NBFCs) that offer this service. The process involves pledging your mutual fund units as collateral against the loan. Once you pledge your units, they are marked with a lien, indicating that they are collateral and cannot be sold or transferred until the lien is removed.

How Much Does It Cost to Get a Loan Against Mutual Funds?

The cost of borrowing against mutual funds typically involves paying interest on the loan amount. Interest rates can vary but generally range from 9% to 11%, depending on the lender, the loan amount, and the tenure of the loan. These rates are often competitive compared to other personal loan options, especially considering the quicker approval and disbursement processes involved.

What is the Advantage of Borrowing Loan Against Mutual Funds?

The primary advantage of borrowing against your mutual fund units is that it allows you to gain immediate liquidity without selling your investments. This is crucial for maintaining your long-term financial strategy intact. It offers a flexible solution for managing short-term cash flows without disrupting your investment portfolio. Additionally, since the loan is secured by your mutual fund units, the interest rates are typically lower than unsecured loan options, making it a cost-effective choice.

How Should I Apply for a Loan?

Applying for a loan against mutual funds is increasingly convenient thanks to digital advancements. Many NBFCs and banks offer online, paperless applications. If your mutual fund units are held in demat form, the application process can be particularly swift, with some lenders offering disbursement in less than an hour if all conditions are met. When applying, you will need to specify the amount of loan and the mutual funds units you wish to pledge. The lender will coordinate with the mutual fund registrar (like CAMS or Karvy) to mark a lien on the pledged units.

How to Remove Lien on the Mutual Fund Units?

After you have repaid the loan, either in full or partially, you can request the removal of the lien on your mutual fund units. The financier will send a request to the mutual fund registrar to remove the lien, and you will receive confirmation that the units are free for you to sell or transfer. If only partial payments are made, the lien can be partially lifted, corresponding to the amount of the loan repaid.

What Will Happen If I Default the Loan?

In the event of a default, where the borrower fails to repay the loan, the lender has the right to enforce the lien. This means the lender can request the redemption of the pledged mutual fund units and claim the proceeds to recover the outstanding loan amount. This action is typically the last resort and follows specific regulations to protect both the lender’s and borrower’s interests.

Conclusion

Borrowing against mutual fund units is a powerful tool for managing short-term liquidity needs without sacrificing your long-term investment goals. It offers a flexible, cost-effective, and efficient means to access funds, providing a safety net when you need cash quickly. As with any financial decision, it’s crucial to understand the terms, risks, and benefits thoroughly before proceeding