Financial planning is an important part of our life but in today’s fast-paced world, time is of the essence! The last thing anyone wants to do today spends hours and hours trying to secure a loan.
Therefore, having access to easy and quick loans without having to slog through the paperwork, is just the need of the hour! Thankfully, for investors who have a portfolio of mutual funds, availing of a loan has never been easier!
Now, as a savvy investor, you may be aware of the benefits of investing in mutual funds – diversification, professional management, and the potential for higher returns. But did you know that your mutual fund units can also act as collateral for a loan? That’s right, some financial institutions and brokerage firms now offer the option for their customers to pledge mutual fund units digitally as collateral for a loan.
With the advent of digital technology, you can now avail a hassle-free loan against your mutual funds in minutes, as opposed to the traditional method of physically transferring ownership of the units. Whether you need money for a rainy day fund, a business venture, or just to make investments, this new loan option is a great way to get started. This can make the process of loan a lot faster and more convenient.
One of the key benefits of availing a loan against mutual funds is the flexibility it provides. The loan can be used for a variety of purposes, such as paying off credit card debt, making a down payment on a house, or funding a child’s education. It allows investors to leverage their mutual fund portfolio for liquidity without having to sell their units, which can have tax implications. Besides, the interest rate on such loans is generally lower than traditional personal loans, making it a more attractive option for investors.
Here’s how it works:
- Customers can pledge their mutual fund units as collateral with the lender, who in turn, will ensure the funds will be returned in case of non-repayment of the loan.
- The lender will then assess the value of the units pledged (NAV) and offer a loan based on a percentage of that value.
- The customer can then use the loan for any purpose, such as paying for unexpected expenses or investing in another opportunity.
- Once the loan is repaid, the lender will release the pledge on the units, and the customer regains full ownership of their mutual fund units.
- It is important to shop around and compare rates and terms offered by different financial institutions and brokerage firms. This will ensure that you get the best deal possible. Additionally, it’s important to read the fine print and understand the terms and conditions of the loan, including the repayment schedule, fees, and any penalties for late payments.
- Another important factor to consider is the loan-to-value (LTV) ratio. This is the ratio of the loan amount to the value of the collateral. A higher LTV ratio means that the loan amount is higher about the value of the collateral, which can be risky. Therefore, it’s important to choose a lender that offers a low LTV ratio, as this will provide a safety cushion in case the value of the mutual fund units decreases. For example, XYZ Bank offers a loan against mutual funds at an interest rate of 8.5% per annum with a loan-to-value (LTV) ratio of up to 60%. Similarly, ABC Brokerage firm offers a loan against mutual funds at an interest rate of 9% per annum with a loan-to-value (LTV) ratio of up to 50%.
- It’s also worth noting that availing of a loan against mutual funds can have an impact on your credit score. This is because the loan is considered a secured loan, and the mutual fund units act as collateral. If you miss any payments or default on the loan, it can hurt your credit score. Therefore, it is imperative to ensure that you have a solid plan in place for repaying the loan before you take it out. Availing of a loan against mutual funds is a practical financial move for investors looking to tap into their investment portfolio for short-term financial needs. It is a win-win situation for those looking for liquidity without having to compromise on their mutual fund units. However, it is equally important to be aware of the consequences and risks attached to it. It is advised to take the help of a loan officer or financial expert before making a decision.