- When it comes to financial planning, mutual funds are one of the most popular investment options. Investors put in money in mutual funds with the aim to generate returns in the long term. But what if you need money immediately? That’s when a loan against mutual funds comes into play. Here are some important things you should know about loans against mutual funds.
1. What is a loan against mutual funds?
A loan against mutual funds (LAMF) is a type of secured loan where mutual fund units are pledged as collateral. Financial institutions like banks and NBFCs provide loans against mutual funds. The loan amount is usually a percentage of the net asset value (NAV) of the mutual fund units being pledged. The NAV of the mutual funds may fluctuate during the loan tenure.
2. Interest rate on loans against mutual funds The interest rate on loan against mutual funds may vary from lender to lender. It usually ranges between 9-12% per annum. Some lenders may offer a lower interest rate, depending on various factors like the mutual fund scheme, loan amount, and lender’s policies. It’s important to compare the interest rates offered by different lenders before opting for a loan against mutual funds.
3. Eligibility criteria for loans against mutual funds The eligibility criteria for loans against mutual funds may also vary from lender to lender. However, here are some common criteria:
– The borrower should be a resident of India
– The borrower should be above the age of 18 years
– The mutual fund units to be pledged should be in the borrower’s name
– The mutual fund should have a certain minimum value, usually ranging from Rs. 10,000 to Rs. 1 lakh
– The mutual fund should be non-locked in or have a lock-in period of less than the loan tenure
4. Loan amount and tenure
The loan amount sanctioned against mutual funds is usually a percentage of the NAV of the mutual fund units being pledged. The loan amount may vary from lender to lender and scheme to scheme. The loan tenure may be up to 3 years in most cases, but some lenders may offer longer tenure as well. It’s important to choose the loan amount and tenure wisely, considering your financial goals and repayment capacity.
5. Risks associated with loan against mutual funds Just like any other loan, a loan against mutual funds also comes with certain risks. The most significant risk is the fluctuation in the NAV of the mutual funds being pledged. If the NAV of the mutual fund falls significantly during the loan tenure, the borrower may need to pledge additional units to maintain the loan-to-value (LTV) ratio or repay a part of the loan. The lender may also require the borrower to maintain a margin or security cover.
Another risk is the potential loss of the mutual fund units being pledged. If the borrower fails to repay the loan, the lender may sell the pledged mutual fund units to recover the outstanding amount. In that case, the borrower would lose the investment. Hence, it’s important to assess your financial situation and repayment capacity before availing a loan against mutual funds.
6. Tax implications
A loan against mutual funds does not have any tax implications as long as the borrower continues to hold the pledged mutual fund units. However, if the borrower sells the pledged mutual fund units to repay the loan, the capital gains tax may be applicable. The tax liability would depend on the holding period and nature of gains.
In conclusion, a loan against mutual funds can be a useful tool to meet your financial needs, provided you understand its risks and benefits. It’s important to choose a reliable lender who offers a competitive loan against mutual funds interest rate and flexible terms. It’s also crucial to maintain the repayment schedule and avoid defaulting on the loan. By doing so, you can use your mutual fund investment to meet your immediate financial needs while also ensuring its long-term growth.
