Loan Against Mutual Funds: Know How to take Loan against Mutual Funds:

Loan Against Mutual Funds: Know How to take Loan against Mutual Funds

Understanding what loan against mutual funds means is no rocket science, as this term simply means borrowing money from a lender by keeping units of mutual fund as collateral. This loan granting method enables people borrowing for the first time or people with low credit scores to bag a loan while avoiding the criteria of paying high interest rates. Understand how this method works and the risks that come along.

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Pledging of Mutual Funds

Just like when a person opts for a gold loan and keeps their items of gold as collateral in order to obtain a loan, pledging of mutual funds also means declaring units of mutual funds as collateral in order to get loan from a bank or any other financial institution. This arrangement allows the borrower to get immediate cash assistance during the hour of need without selling away any investments.

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Major Benefits of Loan Against Mutual Funds

The scheme of loan against mutual funds comes with certain perks that can be enjoyed by the borrower:

• Sustained Investment Growth

Even after borrowing against your mutual fund investments, they remain growing continuously. As not all the units are liquidated, they stay in the market, plausibly making returns.

• Credit Score Remains Unimpacted on Approval 

Unlike other forms of loans, loans against mutual funds are secured and so they have less impact on a borrower's credit score. Punctual repayment of such loan also makes room for building a positive credit history.

• Diversified Usage

While other loans come with restrictions upon where they can be used, loans against mutual funds hold no such sternness. This loan can serve varied purposes, be it funding education, aid for medical emergencies, etc.

Risks Involved

Here's an overview of the risks that come along with loan against mutual funds: Limited Loan Amount: If a borrower is seeking a higher loan amount, it might not be possible with loan against mutual funds, especially if the borrower is asking for a loan against equity funds as collateral. Market Volatility: It is a known fact that mutual funds are ever-changing. Thus, the loan could be affected by the value-to-ratio if the market value changes with time. Liquidation Risk: If the case of loan default happens, the possession of the funds will be lost and the lender can liquidate them to recover the loan amount.

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How to Avail this Facility

Various banks and NBFCs offer this facility of loan against mutual funds. The very first step involves choosing a lender; afterwards, it needs to be checked whether the lender accepts the mutual funds held by the borrower as collateral. The application procedure includes submitting data of the mutual fund investments with scheme name and folio number. Other requirements are signing a lien agreement, allowing the lender to mark a lien on the pledged units.