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Loan Against Mutual Funds Units: A Borrowing Guide

The need for emergency funds is undeniable, especially for investors who indulge in the financial markets.

While traditional loans have played an important role in fulfilling that for years, there’s also a better provision – loans against mutual fund units.

This lesser-known option is one of the most simplified methods to leverage your mutual fund units without selling them.

But how does it work and what are the benefits of mutual fund loans?

Let’s talk about that in detail.

Understanding Loan Against Mutual Funds

Loan against units is a simple terminology that allows you to borrow a loan while keeping your portfolio as collateral.

Similarly with mutual funds, you’re borrowing a loan against your mutual funds’ portfolio.

Because your investment serves as security, these loans often come with lower interest rates as compared to unsecured personal loans.

This reduces the risk for lenders and also saves you on different costs.

Both equity and debt mutual funds can be used as collateral, providing a versatile way to unlock the value of your investments.

How Does It Work?

A variety of lenders and financial institutions will provide you with different types of loans.

Borrowing is such an industry in India that’s only growing. 

To obtain a LAMF, you approach a bank or financial institution and offer your mutual fund units as collateral. 

The lender appraises your portfolio and grants a loan based on its value. 

This allows you to keep your investments intact while accessing necessary funds. 

The Benefits Associated

Loans on mutual funds offer enough reasons to consider them over traditional loans.

To be specific, here’s why most investors prefer mutual fund loans over traditional loans:

– Lower Interest Rates: Typically between 10-12% per year, which is significantly lower than personal loan rates.

– Quick Access to Funds: The application process is straightforward and often completed within just a few hours.

– Retain Investment: Continue to earn from your mutual fund investments while using them as collateral.

– Easier Approval: Collateral reduces the emphasis on credit scores, increasing your chances of loan approval.

The Risks Associated

Even though mutual fund loans are an attractive loan option. But like every loan option, they also have their own pros and cons. Here are some of the risks associated with loans against mutual funds.

– Loss of Investment: Failure to repay can result in the sale of your mutual fund units.

– Variable Interest Rates: These can fluctuate, potentially increasing your repayment amounts.

Short Term: Loan terms typically range from one to five years, requiring timely repayment to avoid financial trouble.

The Costs Involved With Mutual Fund Loans

Every lender that you pursue to enquire about a loan against mutual funds, you’ll find different interest rates in almost all cases.

That’s because of the financial institutions that are tied with these lenders.

At 50Fin, we have an interest rate of 10.5% p.a. for your mutual fund loans.

Application Process in Mutual Fund Loans

Applying for a LAMF involves:

  1. Evaluate Loan Requirements: Determine the purpose of the loan, the amount that you require, and the preferred repayment tenure according to your preferences. 
  2. Check Eligibility: Most platforms have different kinds of eligibility criteria. You need to have a minimum portfolio of Rs 50,000 to borrow a loan against your mutual funds at 50Fin. 
  3. Submit Application: After you’ve signed up on your preferred platform, the next step is to complete your application process. Complete the loan application process by submitting the required documents, including your KYC documents. 
  4. Pledge Your Portfolio: Pledge the required number of mutual fund units in favor of the lender as collateral for the loan. During this period, your mutual fund portfolio will be locked. The units will be lien-marked during the loan tenure. 
  5. Signing the e-agreement: After you’ve pledged your portfolio, the next step is to acknowledge the terms and conditions of the loan that you’re borrowing. 
  6. Setting up auto-debit: Auto-debit (or e-mandates) allow the lending institution to debit the money from your checking account every month on a certain date to maintain the repayment schedule.
  7. Loan Disbursement: Upon approval, the lender disburses the loan amount to your designated bank account, providing access to the funds for your intended purposes.

Strategic Use of LAMFs

The need for loans is inevitable and undeniable.

However, since mutual fund loans are comparatively easier and more convenient, here’s what most investors prefer them for: 

Emergency Needs: Ideal for urgent financial needs without disrupting your long-term investment goals.

Investment Opportunities: Use the loan for short-term liquidity while keeping your long-term investments intact.

Home Loans: Be it home loans, car loans, or any other purpose, mutual fund loans will allow you to borrow more than 50% of the net asset value of your portfolio.

Final Thoughts

For most of your borrowing purposes, a mutual fund loan is one of the best options.

One of the best ways to borrow a loan is to approach a lender who is credible enough for you to trust and convenient enough for you to try.

50Fin is one of those platforms.

Sign up at 50Fin to borrow a loan against mutual funds with just a 10.5% interest rate and maintain financial health while leveraging your investments.

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