Taking loan against mutual funds: Things you need to keep in mind

Most banks and non-banking financial companies (NBFCs) provide loans against mutual fund (MF) investments to individuals, companies, trusts, and other entities. MFs are usually medium- or long-term investments. However, investors are easily able to receive loans against mutual funds in case of emergencies without the need to sell their investments. Getting a loan against mutual funds has several benefits. For instance, the interest rate on the loan is much less than credit card loans or personal loans. There are two kinds of loans against mutual funds- secured and unsecured. A secured loan refers to loans which are backed by collateral like mutual fund investments. Secured loans generally have lower interest rates, however one may be required to pledge a larger portion of his/her mutual funds as collateral.An unsecured loan is a type of loan which is not backed by any collateral. This type of loan is similar to credit card or personal loans, and is not backed by any financial assets owned by the borrowers. Hence, a higher interest rate is charged by the bank.EligibilityThe credit score of the applicant or firm, and steady income decide the eligibility for getting a loan against mutual funds. A higher credit score may enable the applicants to negotiate for a lower interest rate. The tenure, loan amount, and interest rate are fixed by the banks/financing institutions.Things to keep in mind while taking loan against the mutual funds:Necessary documents: You are required to furnish documents such as proof of income, proof of identity and proof of ownership of the mutual fund investments when you are applying for a loan against mutual funds. The investors may also need to provide their bank statements, PAN card, and other financial documents to the bank.Loan terms: Investors need to carefully read the loan terms provided by the bank before availing the loan. One needs to check the loan tenure, interest rate, and other charges, and calculate the payback amount. You can also compare the offers with other schemes to choose the best one.Pledge the mutual funds: Investors are required to pledge their mutual funds as collateral with the lender against the loan they are availing. Hence, the lender is going to have a lien on their mutual funds till the repayment of loan.Loan repayment: One should carefully go through the repayment clauses of any loan against mutual funds. If investors pay back the loan’s partial amount, then that proportion of mutual fund units may be made free from the lien (legal claim) in several cases. You can still earn dividends from your MF investment after you have taken a loan against it. If an investor fails to repay the loan, then the lender may sell his/her mutual fund investments to recover the loan amount.It should be noted that a loan against your investment can cause delay in the achievement of your financial goals.Read all the Latest News, Trending News, Cricket News, Bollywood News, India News and Entertainment News here. Follow us on Facebook, Twitter and Instagram.

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Published on : 2022-12-16 06:33:22

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