5 Must Know Things For A Loan Against Mutual Funds

  Author: Naveen Kumar

The script of life is such that it can have unpredictable twists and turns. Not all of them can be pleasant. This means an emergency or any other urgent requirement for cash may force you to consider liquidating well-performing investments such as those in mutual funds.

A smarter idea is to not to do that since you might make a loss during redemption of units or suffer from an interruption in your investment effort for major future needs like child’s higher education. You can take a loan against mutual fund units. This is less costly than a personal loan or taking credit card debt.

However, you need to know about five important things about loans against mutual funds before you take such a loan.

·      Maximum loan amount is typically up to 50% of the prevailing net asset value (NAV) of all pledged equity mutual funds.

·      Interest rate offered on this loan is generally lower than an unsecured personal loan.

·      The lending institution may decide upon loan based on quality of your mutual fund portfolio. Mutual fund performance holds key to the loan amount. Stable and consistently performing mutual fund investments can help you get a higher loan amount.

·      You will have to allow the lending institution to mark a lien partially or fully. This will prevent you from selling these units till the loan is repaid.

·      If you have invested in a dividend option, you can keep receiving the dividends. However, you can sell the units only on the repayment of the loan

If you have been investing regularly in mutual funds, you are on your way to fulfill some of the major goals in life. But when you urgently need cash, you can also get a loan against your mutual funds at a lower loan rate that that of an unsecured loan. This way you save yourself from undoing the good work of making regular investments for your major goals with premature redemption of mutual fund units. Knowing the features of loans against mutual funds will help you a lot in deciding whether such a loan is right for you.