Loan Against Mutual Fund Investments: 5 Things To Know Before Availing

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Like loan against shares, one can also avail a loan against mutual fund investments or units. Of course, this is not so much in vogue like loan against shares. The mechanism to avail a loan is not too different than that prevailing for shares.

Banks offer a 50 per cent margin and there is a maximum cap of Rs 20 lakh on the loan amount that you can be eligible for.

Loan Against Mutual Fund Investments: 5 Things To Know Before Availing

1. Individuals looking to avail loan should fill an application that has to be filed by all joint holders of the mutual fund folio.

2. Usually, loan amount will be at rates lower than those for unsecured personal loans. Once the loan is approved the lien will be marked on the units, and will be lifted when the loan is repaid.

3. The lender of the loan will mark a lien after notification to the registrar or the asset management company. Note that a lien can be marked on all or part of the units held in a folio.

4. Interest rate can vary depending on the tenor of the loan, the credit score and the extent of margin charged.

5. Even when the lien is marked on the units, one is eligible to receive dividends from the company. However, one cannot redeem until the lien is removed.

Availing loan on units is another way to pledge your mutual funds, in case do not wish to sell them at this point.

In case where borrower fails to make payment, the lender can take action and can enforce the lien. Means your lender has all the right to redeem your mutual fund units in case of default. That mechanism is going to be lengthy.

Interest rates on mutual fund units are as competitive as most other forms of loans, where you pledge your securities or gold. The one good thing is that interest rates in the economy have dipped anywhere between 50-100 basis points in the last one year.

 However, you need to compare the interest rates on other loans like gold loans and shares before you avail of this loan.

Probably, the net asset value of the units will be taken into account. Unlike loan against shares, where only a select number of shares qualify for loans, it may not be possible to restrict only loan to certain mutual fund units.

Also, ULIPs may not qualify for these loans. You need to check with your bankers on the type of mutual fund units, that would qualify for loans against the mutual fund units.

Read more about: mutual fund, loan
Story first published: Friday, December 11, 2015, 12:07 [IST]
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