Mutual funds are a popular way to invest money in India. Many people choose them because they are managed by experts and can give good returns. Sometimes, you may need money quickly for an emergency or a big expense. Instead of selling your mutual funds, you can take a loan against them.
Banks and financial companies give loans against mutual funds. You just need to use your mutual fund units as security. Here are the top 5 benefits of mutual fund loans:
1. Quick Access to Funds
One of the key benefits of mutual fund loans is fast access to money. Once approved, the loan amount is quickly credited to your bank account, sometimes within a few hours. This makes these loans very useful for urgent expenses. Approval is faster than other loans because mutual funds can be easily converted to cash. As long as you meet the lender’s criteria, you get money without selling your investments.
2. Continue Earning Investment Returns
Getting a loan against your mutual funds allows you to access cash while still keeping ownership of your mutual fund units. Since you retain the units, your investment keeps growing, enabling you to gain from the potential increase in capital value and earn dividends or income distribution.If you redeemed the mutual fund units, you would miss out on benefiting from future growth. Loans against mutual funds allow you to fulfil temporary needs without disturbing your core investment portfolio.
3. Lower Interest Rates
Loans against mutual funds usually have lower interest rates than personal loans or credit cards, typically between 10% and 16%. Since your mutual fund units act as security, lenders see less risk and offer better rates. This keeps your borrowing cost lower compared to unsecured loans.
4. Repay Conveniently
Flexible repayment is a significant benefit of mutual fund loans. You can choose to repay over a few months up to 3-5 years. Some lending institutions even allow parts of the principal and interest to be paid every month, quarter, half-year, or annually. There is also minimal paperwork and no rigid repayment structures, allowing borrowers to structure repayments according to their requirements.
5. Easy to Apply
The application process for mutual fund loans is simple and fully digital. Upload your Customer (KYC) documents and mutual fund statements online, and get quick approval. Once approved, the loan amount is transferred to your bank account via National Electronic Funds Transfer (NEFT) or Real-Time Gross Settlement (RTGS) within a short timeframe. This ease of application and quick fund access make mutual fund loans very handy.
Who Should Opt for Loans Against Mutual Funds?
If you have a sizeable investment portfolio in mutual funds, getting a loan against them can serve multiple needs without liquidating your holdings. Some situations where these loans prove beneficial include:
- Bridging short-term fund needs: You can use a loan against mutual funds when faced with sudden medical expenses, a family emergency, etc., without redeeming your MF units.
- Making a down payment for an asset purchase: The loan amount can fund the initial down payment for buying real estate, auto or any other asset.
- Planning your higher education/travel: The loan helps fund your international education or dream vacation easily.
- Expanding or renovating your business: Securing capital for your business growth becomes convenient with a loan against MFs.
- Consolidating high-cost debt: You can consolidate all your outstanding credit card dues or personal loans at lower interest rates.
Before Getting a Loan Against Mutual Funds
While loans against mutual funds make accessing liquidity easy, you should assess a few things. Estimate the quantum of loan you need so that you pledge MF units adequately higher than the required amount. Compare interest rates, tenure and repayment structures offered by different lending companies online.
This helps you select the financial institution offering better terms on mutual funds loans. Those with higher Net Asset Values (NAVs) and steady track records usually get higher approvals too. Avoid defaulting on repayments as it can lead to the lender redeeming your pledged mutual fund units.
Understand the applicable tax treatments for the interest portion in your specific situation. Overall, evaluate whether raising funds via a loan against MFs better meets your needs before applying.
Conclusion
A loan against mutual funds is a good way to get money fast without selling your investments. It is easy to apply, has lower interest rates, and lets your money keep growing. As long as investors do their due diligence on loan terms and risks, loans against MFs serve as an ideal financing tool for meeting various fund needs while retaining ownership of your investments for continued growth.
FAQs
What are the primary benefits of taking a loan against mutual funds?
The key benefits of mutual fund loans include quick access to funds, retaining ownership of your investments, lower interest rates compared to other loans, flexible repayment options, and ease of application.
How does retaining ownership of mutual funds benefit me?
Retaining the mutual fund units allows your investment to continue growing. So, you can benefit from future capital appreciation and earning dividends or income distribution. You don’t lose out on potential growth, which would happen if the units were redeemed.
Why are interest rates lower for loans against mutual funds?
Since mutual fund units are pledged as collateral, lenders see them as a very low-risk option compared to unsecured loans. This allows them to offer lower interest rates, typically ranging from 10% to 16%.
How quickly can I access funds through a loan against mutual funds?
In some cases, the approved loan amount can be credited to your account within a few hours of applying. The process is faster than that of other loans, as mutual funds are liquid assets.
Can I use the funds from a loan against mutual funds for any purpose?
Yes, loans against mutual funds are typically unrestricted loans. You can use the loan amount for any personal or business purpose without having to provide the lender with end-use details.
What flexibility do loan repayment terms offer?
You may get a repayment tenure ranging from 3 months to 3 years. Some lenders allow paying interest and principal in EMIs, while others may allow quarterly, half-yearly or annual repayments.
How do loans against mutual funds compare to personal loans?
The interest rates are much lower compared to personal loans. Also, the processing time is shorter and eligibility criteria easier to meet because of mutual fund units being pledged.
What should I consider before opting for a loan against mutual funds?
Before applying for a loan, assess your need for funds, compare costs and terms across lenders, understand the risks involved, and evaluate whether this option better suits your requirements than other sources.