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Using Mutual Fund Investments as a Safety Net in Emergencies

Things to Know About Get Loan Against Mutual Fund Units

The initial step in any financial scheme is to prepare for emergencies. Keeping a specific amount of money in a savings account or liquid fund can assist in managing difficult situations. However, there may be times when the emergency fund falls short and borrowing becomes necessary. Loans against collateral can be beneficial in such scenarios.

Leveraging Mutual Fund Investments for Loans

Most people are aware that loans can be taken against gold or property. Yet, few realize that their mutual fund investments can also serve as collateral for loans. In this article, we explore the concept of loans against mutual funds in detail.

Understanding Loans Against Mutual Funds

A loan against a mutual fund operates similarly to other collateral-backed loans. Here, your mutual fund investment acts as the collateral. A bank or financial institution places a lien against your mutual fund units and dispenses the loan. The bank maintains ownership of your fund units until the loan is repaid, during which time you cannot redeem those units.

Applying for a Loan Against Mutual Funds

Many banks currently offer instant loans against mutual funds, akin to an overdraft facility. These loans can also be applied for offline, where a loan agreement is set up with the bank. The bank then instructs a mutual fund registrar to place a lien on the pledged units. Once confirmed, the lien is stamped and a letter is sent to both the lender and borrower.

Considerations When Borrowing Against Mutual Fund Units

Loans can be procured against various types of mutual funds including equity funds, debt funds, and hybrid funds. However, the loan amount is dependent on the type of mutual fund and differs from bank to bank. Additionally, not all mutual funds may qualify for loans, each bank has a list of approved mutual funds.

Advantages of Loans Against Mutual Funds

Taking a loan against a mutual fund can prove more beneficial than selling your mutual fund units. Some advantages include:

• Emergency Relief: In times of crisis, pledging your mutual fund units can provide instant funds.
• Meeting Short-term Financial Needs: Loans against mutual funds can be an effective way to raise short-term funds without compromising ownership of your units.
• Lower Interest Rates: Loans secured by mutual funds often have lower interest rates compared to unsecured loans.
• Continued Investment: Your pledged mutual fund units remain invested and continue to generate returns.
• Interest on Utilised Amount Only: With loans against mutual funds, interest is only paid on the credited amount, not the total loan amount.

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