Features and Benefits of Loan on Mutual Funds

A loan on mutual funds provides an excellent way to access funds without selling your investments. This article dives into the features and benefits of this financial option, offering practical, detailed explanations to help you make an informed decision. So, let’s begin!

Key Features of Loan on Mutual Funds

A loan on mutual funds is characterized by several features that make it an attractive option for many investors. Here, we will break down these features in detail

●   Pledging Mutual Fund Units

When you opt for a loan on mutual funds, your fund units are pledged as collateral. This means you don't need to sell your investments to access liquidity. The lender will place a lien on the units, and you continue to be the owner of these units. This ownership allows you to benefit from any appreciation in the value of the mutual funds and any dividends that might be declared.

●   Loan-to-Value (LTV) Ratio

The Loan-to-Value ratio indicates the amount of loan you can avail against the value of your mutual fund units. Typically, the LTV ratio ranges between 50% to 80%. For instance, if your mutual fund units are worth ₹10,00,000 and the lender offers an LTV ratio of 70%, you can avail a loan of ₹7,00,000. This ratio varies depending on the type of mutual fund and the lending institution's policies.

●   Interest Rates

Interest rates on these loans are usually lower than those on unsecured loans such as personal loans or credit cards. This is because the loan is secured against your mutual fund units, reducing the lender's risk. Interest rates can be fixed or floating, and it's crucial to compare rates from different lenders to find the most cost-effective option.

●   Flexible Repayment Options

Such loans come with flexible repayment options. You can pay the interest monthly while repaying the principal amount at the end of the loan tenure, or you can opt for an EMI option where both the principal and interest are paid monthly. This flexibility allows you to manage your cash flow according to your financial situation.

●   Quick Processing and Disbursal

The processing time for a loan on mutual funds is relatively quick. Once the mutual fund units are pledged and the necessary documentation is completed, the loan amount is usually disbursed within a few days. This quick turnaround time makes it an attractive option for those needing immediate funds.

●   Continued Investment Benefits

Even though the mutual fund units are pledged, you continue to enjoy the benefits of your investments, including any dividends or growth in the value of the mutual funds. This dual benefit of having access to liquidity while still earning returns on your assets is a significant advantage of this type of loan.

Benefits of Loan on Mutual Funds

Opting for such loans has several benefits, making it a preferred choice for many investors. Let's explore these benefits in detail:

●   Retaining Investment Ownership

One of the primary benefits of a loan on mutual funds is that you retain ownership of your fund units. This means you can still benefit from any capital appreciation and dividends. You do not have to liquidate your investments to access funds, allowing your investments to grow over time.

●   Lower Interest Rates

Compared to unsecured loans, the interest rates on mutual fund loans are generally lower. This cost-effectiveness is due to the secured nature of the loan, as the mutual fund units act as collateral. Lower interest rates reduce the overall cost of borrowing, making this a financially prudent option.

●   No Prepayment Penalties

Many lenders do not charge prepayment penalties on loans on mutual funds. This means you can repay the loan amount before the end of the tenure without incurring additional costs. This flexibility allows you to manage your finances more effectively and reduce interest costs if surplus funds are available.

●   Access to Immediate Funds

A loan on mutual funds provides quick access to funds, which can be crucial during emergencies or for meeting immediate financial needs. The application process is straightforward, and the disbursal is swift once the mutual fund units are pledged. This quick access to liquidity is one of the major benefits of this type of loan.

●   Customized Loan Amount

The amount you can borrow through a mutual funds loan is flexible and depends on the value of your mutual fund units. This customisation allows you to borrow exactly what you need, whether for a small financial requirement or a larger expense. You can leverage the value of your investments without having to liquidate them.

●   No Impact on Credit Score

Since a loan on mutual funds is secured, it does not adversely impact your credit score. Timely repayment of the loan can enhance your creditworthiness. This is beneficial for maintaining a good credit profile, especially if you plan to take other loans in the future.

How Do You Apply For a Loan on Mutual Funds?

Applying for a loan on mutual funds involves easy-to-understand steps. Here’s a detailed guide on the application process:

1. Research and choose a lender that offers competitive interest rates and favourable terms for a loan on mutual funds.

2. Log in to Internet Banking.

3. Go to ‘Cards & Loans’ and select ‘Loan Against Mutual Funds.’

4. Choose the type of Mutual Fund to use as collateral.

5. Enter the required details and FATCA information.

6. Calculate your final loan amount.

7. Access your funds via the new Overdraft Account.

Conclusion

A loan on mutual funds offers a practical and efficient way to access liquidity without selling your investments. By understanding the features and benefits, you can make an informed decision and leverage this financial option to meet your financial needs.

Whether you need funds for personal or business purposes, a loan on mutual funds provides flexibility, lower interest rates, and the ability to retain investment benefits.