Mutual funds have become some of the most preferred investment vehicles over the past few years due to their higher returns than traditional savings accounts and fixed deposits. Now, while most people are familiar with mutual funds as an investment option, many may not know that one can also obtain a loan against mutual funds to meet financial needs. Loans against mutual funds or loan on mutual funds is an excellent option for those who own such funds in their portfolio.
In simple terms, a loan on mutual funds is also a type of secured loan much like a loan against property or gold loan, and it is availed by pledging your mutual fund units with a financial institution. Loan against MF is secured against the mutual fund’s market value. People usually opt for a loan on mutual funds in case of emergencies such as death in the family, medical emergencies, or major business expansion, among other reasons. Loan on mutual funds has gained popularity because of its lower interest rates compared to other forms of loans.
However, not everyone can avail of a loan on mutual funds, and one must meet specific eligibility criteria set forth by the lenders. In this article, we will see the eligibility criteria for obtaining a loan on mutual funds and discuss the process involved.
The first eligibility criterion is that the investors must be the owner of the mutual funds. It means that those who have invested in mutual funds and have the units in their own name can apply for a loan on mutual funds. The investor must also have a minimum fund balance in their mutual fund account to qualify for a loan. Most lenders have a minimum threshold amount that can differ from one lender to the other. The threshold value deploys that the fund balance must meet before an investor is eligible to avail of the loan.
The sum of a loan that can be availed is dependent on the value of your mutual fund units. Generally, most lenders allow borrowers to obtain a loan between 50% to 80% of the market value of the mutual fund units. Lenders offer a different rate of interest depending on the value of mutual fund units and loan tenure.
The investor must keep in mind that the loan taken against mutual funds’ market value will enable investors to avail only a partial amount of the entire market value of the investment. In short, not the entire amount invested in the mutual funds will be available for taking the loan.
Another critical factor that determines your eligibility for a loan on mutual funds is your credit score. A high credit score increases the chances of approval, while a low credit score might lead to a rejection of the application. A good credit score reflects the financial discipline of the borrower and the ability to repay the loan.
Loan on mutual funds is unique because the securities against which the loan is sanctioned are held transparently, so tracking the lending and borrowing relationship is more straightforward. Thus, in case of non-payment or default, the mutual funds can quickly be liquidated to recover the amount owed, ensuring that the lenders don’t lose their money.
Investors must also understand that they would not be able to redeem their mutual fund units during the loan period. The financial institution providing the loan uses the pledged units to ensure the repayment. Even if the market value of the mutual fund units changes, the borrower must deposit the entire sum of money determined at the start of the loan tenure.
To apply for a loan on mutual funds, investors must visit the financial institution of their choice that provides such loans and fill in the necessary paperwork. Once the paperwork is complete, the lender will check the eligibility criteria and verify the mutual fund documents’ genuineness. After verifying your documents and application, the lender will complete the necessary procedures and provide you with the loan amount within a specified time frame.
Conclusion
In conclusion, a loan on mutual funds is an excellent option for those who need financial assistance in times of emergencies. Before opting for a loan against mutual funds, one must assess their financial situation so that they can ensure repayment of the loan. Eligibility requirements and loan approvals differ with each lender, so it’s best to research different options thoroughly before making a decision. Investors must also keep in mind that there is a risk associated with pledging mutual fund units as security, and doing so should be a well thought out decision, having weighed all the options.