Loan on Equity Mutual Funds: Everything You Need to Know
Equity mutual funds are one of those investment vehicles that have been around for a long time – delivering results to countless investors.
By definition and meaning, equity mutual funds refer to a mutual fund that invests principally in stocks.
This investment can be actively or passively (index fund) managed. These types of mutual funds are categorized according to the size of a company, and the investment style of the holdings – among other factors.
But what if you have you draw a loan from equity mutual funds?
Is it possible?
And if it is, how can you do that?
This is a post explaining everything about loans on equity mutual funds.
Let’s get started.
Understanding Loans on Equity Mutual Funds
Loans against real estate and physical properties are common.
But over the past few years, loans on mutual funds have been gaining traction because of being a flexible and efficient way of keeping your investments as collateral.
The phenomenon of loans on mutual funds allows investors to borrow funds from financial institutions by using their equity mutual funds as collateral.
These loans typically offer a percentage of their portfolio or net asset value (NAV) of the mutual fund units pledged, with the exact amount varying depending on the lender and the specific mutual fund scheme.
Benefits of Loans on Equity Mutual Funds
Over the past few years, loans on mutual funds have been gaining momentum in India.
Evidently, loans against mutual funds have a lot of reasons as to why you should prefer them over traditional investments.
Here are some of those reasons:
1. Liquidity without liquidating assets
Most investors love the idea of drawing money without having to liquidate their assets. And what better way to do that than drawing a loan against your mutual funds?
This is particularly beneficial during market downturns when selling investments may result in losses or trigger tax implications.
By leveraging their mutual fund holdings, investors can meet their financial needs while retaining ownership of their investment portfolio.
2. Competitive interest rates
Platforms like 50Fin have a competitive interest rate of 11% p.a that allows investors to prefer it more over unsecured loans or credit facilities.
But why is it so?
In such loans, the mutual fund units serve as collateral.
This allows the lenders to typically offer lower interest rates, making this borrowing option cost-effective for investors.
3. Quick and convenient access to funds
Traditional loans infamously are notorious for their lengthy approval process and tedious documentation requirements.
It’s very understandable why most lenders are moving away from traditional loan processes and digitizing them.
The digital lending industry has grown to $350 billion by 2023 – and is still on the rise.
Loans on equity mutual funds can be relatively quick and hassle-free.
The approval method also is relatively simple as documentation majorly depends on the digital KYC. Such things majorly improve the lending process and make it extremely convenient for newcomers to draw a loan against their mutual fund portfolio.
4. The mutual fund portfolio remains unaffected
Even when you pledge your mutual fund units to take a loan against them, the units in your portfolio still remain invested in the market.
How this happens is quite simple!
Your mutual fund units act as collateral. But the vendor you draw your loan from sells the mutual fund units ONLY in case you default.
But as long as you don’t default, your mutual fund units stay invested the same way they originally were and you continue to earn returns on them.
Considerations Before Opting for Loans on Equity Mutual Funds
1. Risk of Margin Calls
When taking out a loan against equity mutual funds, investors should be aware of the risk of margin calls.
If the value of the pledged mutual fund units falls below a certain threshold, known as the maintenance margin, lenders may require additional collateral or repayment of part of the loan to maintain the required loan-to-value ratio.
Failure to meet margin calls could result in the forced sale of mutual fund units, potentially crystallizing losses for the investor.
2. Market Volatility and Investment Risks
Investing in equity mutual funds inherently carries market risks associated with fluctuations in stock prices and broader economic conditions.
During periods of market volatility, the value of mutual fund units pledged as collateral may decline.
This can potentially increase the risk of margin calls or affect the investor’s ability to repay the loan.
Investors also need to carefully evaluate their risk tolerance and financial situation before leveraging their mutual fund holdings through loans.
Borrow loan on mutual funds with 50Fin
With the benefits and convenience that loans against equity mutual funds offer, it’s almost impossible to think of any other traditional routes than this.
However, it is essential to weigh the potential benefits against the risks, including margin calls, impact on investment returns, and market volatility.
And if you want a quick way to get started, 50Fin is one of the best ways to do that.
With no minimum CIBIL score required, 4 working hours approval time, and completely digital documentation, it’s a no-brainer to sign up on 50Fin and borrow a loan against your mutual funds.
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