As we all know life is highly unpredictable. Thus, a person can experience a temporary capital crunch once in a while for numerous reasons. For example, it could be due to a lot of factors such as home renovation, a wedding in the family, or a medical emergency. In a scenario such as cash-strapped situations, the foremost idea that usually occurs is to utilize the savings and to liquidate the investments even at a loss. Additionally, if that is still not sufficient, one can look for a Personal loan.
This, nevertheless, is not the best plan of action. As an alternative to purchasing your mutual fund investments, one can easily avail a loan against them. Yes, just as a person can pledge other kinds of assets for example gold as well as real-estate for a loan, one can avail a loan against the Mutual Fund holdings from banks as well as Non-Banking Financial Companies abbreviated as(NBFCs).
In this blogpost, we will eventually discuss key things about availing personal loans against mutual funds.
- Avail a Loan Only Up to a Limit of the Mutual Fund Holdings
The amount of loan one can get against the mutual fund holdings largely depends on the kind of mutual fund scheme one has invested in as well as the financial institution from which one will eventually borrow.
For instance, banks including HDFC as well as the ICICI give a person a loan up to 50% of the Net Asset Value (NAV) in the case of equity mutual funds as well as up to 80% in the case of debt mutual funds. Axis Bank, on the other hand, offers a loan up to 85% of the value of the debt mutual fund schemes along with 60% of the value of the equity mutual fund scheme.
- Â Not all Banks avail Loan Against all Mutual Funds
Various banks frequently lend capital only against a set of mutual fund schemes mostly selected by them.
For example, SBI only offers loans against mutual schemes of SBI Mutual Fund. HDFC Bank as well as ICICI Bank are also firmly selective about the various schemes against which they lend money. Both of these private banks provide loans on mutual fund schemes managed by asset management companies registered with Computer Age Management Solutions Private Limited abbreviated as (CAMS).
Just for the same, Axis Bank has listed a set of mutual fund schemes on its website against which it tends to lend capital.
- An Upper Limit on the amount of Loan one Can avail
Like any other kind of loan, there are various limits in loans against mutual funds as well. Numerous banks have a maximum as well as the minimum limit on the amount of loan one can get.
For example, most big private banks such as the ICICI Bank have set the minimum loan amount at Rs. 50,000. Also the maximum amount at Rs. 20 lakh in such a case of equity mutual funds as well as up to Rs. 1 crore in such a case of debt mutual funds.
In any case of NBFCs, both the minimum as well as the maximum limits are generally greater. For example, the minimum loan amount at Aditya Birla Finance is usually Rs 25 lakh along with the maximum is Rs. 10 crore. Just like this is the case with Bajaj Finserv as well.
- Loans Against Mutual Fund Cost usually Lower Than Personal Loans as well as Credit Card Loans
A significant advantage of a loan against any mutual funds is that one can avail a lower rate of interest than credit card loans or personal loans. This is also because loans against mutual funds are also highly secured for that they are usually backed by collateral.
For instance, one will have to pay a rate of interest of 8-10% on loans against mutual funds. This will vary based on the bank as well as the mutual fund schemes one can choose. The rate of interest is reduced if one pledges units of debt fund schemes, as well as it is on the increased side if they pledge units of equity fund units.
On the other hand, in such a case of unsecured loans such as credit card loans or personal loans, the loan is typically not backed by any financial assets owned by an individual. Thus, the bank is likely to charge you an increased interest rate than 8-10% to commensurate the increased risk it is taking.
- Earn Returns On Pledged Mutual Fund Units
When a person usually pledges their mutual fund units to avail a loan against them, those units that generally stay invested in this market. This is also because when a person pledges their mutual fund units at a bank, one can give the bank the appropriate to sell the mutual fund units only in case of this default. However, as long as an individual does not default, the investments remain linked to the market along with continuing to earn returns on them.
Therefore, a person must make sure that the financial plan is still intact as well as at the same time one gets to raise the much-needed capital on short notice without redeeming any units.
- Apply Online to avail An Overdraft Limit Set In Bank Account
Grateful to technology, various banks such as SBI, HDFC, ICICI, etc are now availing a loan against the mutual fund holdings online. All a person requires to do is pledge the mutual fund units online as well as to avail an overdraft limit set in the respective bank account.
Overdraft facility generally means a credit agreement with the bank that usually allows an individual to withdraw more capital than what they have in their account. It has a pre-approved limit. For instance, if the overdraft limit is of the amount Rs. 2 lakh as well as having Rs. 50,000 in the respective bank account, then they can withdraw up to Rs. 2.5 lakh from this account. In order to avail of this overdraft facility, the bank will tend to charge the rate of interest.
To Conclude
A loan against any mutual fund units as opposed to credit card loans or personal loans seems an improved option as of the lower rate of interest. However, the level of rate of interest on Personal loans against mutual funds is, generally, more than loans against gold or any fixed deposits. Thus, to consider all these vital options prior to deciding to avail a loan.