Thread by @krishstocks

Things to Know About Loans Against #MutualFunds

Life is unpredictable. So, you can experience a temporary money crunch once in a while for various reasons. For instance, it could be due to a home renovation, a wedding in the family, or a medical emergency.

In such cash-strapped situations, the first idea that occurs is to use your savings and liquidate your investments even at a loss. And if that is still not enough, you look for a loan.

This, however, is not your best plan of action. Instead of selling your mutual fund investments, you can get a loan against them. Yes, just as you can pledge other assets such as gold and real-estate for loan, you can get loan against your MutualFund holdings from banks and NBFCs

⛔️ You Can Get a Loan Only Up to a Limit of Your Mutual Fund Holdings

The amount of loan you can get against your mutual fund holdings largely depends on the type of mutual fund scheme you have invested in and the financial institution from which you will borrow.

For instance, banks like HDFC & ICICI give you a loan up to 50% of the NAV in the case of equity mutual funds & up to 80% in the case of debt mutual funds. on the other hand, Axis provides a loan up to 85% of the value of your debt fund and 60% of the value of your equity fund

⛔️ Not All Banks Give Loan Against All Mutual Funds

Many banks lend money only against a set of mutual fund schemes selected by them

For instance, SBI only gives loans against schemes of SBI Mutual Fund.

HDFC & ICICI are also selective about the schemes against which they lend

Both these private banks offer loans on the mutual fund schemes managed by asset management companies registered with Computer Age Management Solutions Private Ltd CAMS)

Similarly, Axis Bank has listed a set of mutual fund schemes on its website against which it lends money.

⛔️ There Is A Upper Limit on Loan Amount You Can Get

Like any type of loan, there are certain limits in loans against mutual funds as well. Many banks have a maximum and minimum limit on the amount of loan you can get.

For instance, most big private banks like ICICI Bank have set the minimum loan amount at Rs. 50,000 and the maximum amount at Rs. 20 lakh in case of equity mutual funds and up to Rs. 1 crore in case of debt mutual funds.

In the case of NBFCs, both the minimum and maximum limits are usually higher. For instance, the minimum loan amount at Aditya Birla Finance is Rs 25 lakh and the maximum is Rs. 10 crore. Similar is the case with Bajaj Finserv as well.

⛔️ Loans Against Mutual Fund Cost Less Than Personal & Credit Card Loan

key benefit of a loan against mutual funds is that you get a lower interest rate than credit card loans & personal loans. This is because loans against mutual funds are secured, they are backed by collateral

For instance, you will have to pay interest rate of 8-10% on loans against mutual funds. This will vary based on the bank & the fund schemes you choose. The interest rate is lower if you pledge units of debt fund schemes, and it is on the higher if you pledge units of equity fund

On the other hand, in the case of unsecured loans like credit card loans or personal loans, the loan is not backed by any financial assets owned by you. So the bank is likely to charge you a higher interest rate than 8-10% to commensurate the higher risk it is taking.

⛔️ You Continue To Earn Returns On Your Pledged Mutual Fund Units

When you pledge your mutual fund units to take a loan against them, those units stay invested in the market. This is because when you pledge your mutual fund units at a bank,

you give the bank the right to sell the mutual fund units only in case you default. But as long as you do not default, your investments remain linked to the market and you continue to earn returns on them.

Thus, you ensure that your financial plan is still intact and at the same time you get to raise the much-needed capital on short notice without redeeming any units.

⛔️ You Can Apply Online And Get An Overdraft Limit Set In Your Bank Account

Thanks to technology, many banks like SBI, HDFC, ICICI are now giving a loan against your mutual funds online. All you need to do is pledge your mutual fund units online and get an overdraft limit

Overdraft facility means a credit agreement with your bank that allows you to withdraw more money than what you have in your account. It has a pre-approved limit. For example, if the overdraft limit is Rs. 2 lakh and you have Rs. 50,000 in your bank account,

then you can withdraw up to Rs. 2.5 lakh from that account. For availing of this overdraft facility, the bank will charge you interest.

Final word

A loan against MF as against credit card & personal loan seems a better bcoz of the lower interest rate. Nevertheless, the level of interest on loan against mutual funds is, typically, higher than loan against gold or FD. consider all the options before you take loan.

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