Loans can be availed at low interest rates by pledging mutual fund units, allowing investors to meet financial needs while maintaining their investments.
Mutual Fund Benefits: The trend of taking loans against Mutual Funds (MFs) is rapidly increasing among retail investors. Investors are now understanding that maintaining long-term investments is more beneficial. When faced with sudden financial needs, they find taking a loan against their mutual fund units a better option than redeeming them.
Digital Processes Boost Loan Demand
Previously, obtaining loans against mutual fund units was entirely offline, taking 5-7 business days. Now, the process is fully digital. Investors can obtain these loans quickly from the comfort of their homes or offices. According to Krishna Kanhaiya, CEO of Mirae Asset Financial Services, these loans are now available online and can be accessed very quickly and easily.
SIPs Fuel Loan Base Growth
The rise in Systematic Investment Plans (SIPs) has created a large base of mutual fund assets that can be pledged for loans. Previously, investors would sell fund units during market downturns, but now they prefer taking loans against these units instead of redeeming them.
Mutual Fund Loans Cheaper Than Personal Loans
Loans against mutual funds are proving more affordable than personal loans. Experts say interest rates on these loans typically range between 10 and 14 percent. Kanhaiya mentions his company charges an annual interest rate of 10.5%, while C.R. Chandrasekhar, CEO of Dhanlap, states his company offers these loans at an interest rate between 10.5-11%.
Loan Advantages: Overdraft Facility and No Foreclosure Charges
Some lenders offer these loans as overdrafts. This provides customers with a limit from which they can withdraw funds as needed.
- There are no fixed EMIs; interest is charged only on the amount utilized.
- Principal repayment can be done at the customer's convenience.
- No foreclosure charges apply if the loan is repaid early.
- The lien on mutual fund units is removed within 24 hours of closing the loan account.
Caution Against Margin Calls
Market fluctuations can impact the value of pledged securities, potentially leading to margin calls. If the borrower fails to make timely payments, their assets may be seized. Furthermore, returns from equity mutual funds are not always guaranteed.
Selling Units Preferred if EMI Payment Becomes Difficult
Mutual fund loans can be beneficial for long-term investors. However, they should only be taken for essential needs. Abhishek Kumar, a SEBI-registered investment advisor, suggests that if EMI payments become problematic, it is better to sell mutual fund units to raise funds.
