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Mutual Funds - Loans against mutual funds explained

Loans against mutual funds allow you to borrow by parking your mutual fund investment as collateral. “Since the loan is backed by an asset, interest rates are lower than that of a personal loan and are typically 10-12% per annum," said Ankur Choudhary, co-founder and chief investment officer of Goalwise, a mutual fund investment platform. “You cannot redeem the mutual fund units as long as they are pledged to the bank and the bank can redeem it in case of default." You can borrow a minimum amount of 25,000 and a maximum amount of 5 crore. Processing fee ranges from 0.25% to 1% of the loan amount.

How does it work?

Each financial institution will have a list of approved mutual funds against which they will be willing to give loans. “You have to enter into an agreement with the bank and grant ownership of the fund to the bank, which gives the banks the right to sell the fund in case of non-payment of loan," said Rachit Chawla, founder and chief executive officer of New Delhi-based Finway Capital, a platform for investment advisory and loans. “The limit of the loan amount is typically up to 50% of the net asset value of the mutual fund units pledged in case of equity and up to 70-80% in case of debt funds," said Choudhary.

“Pledging mutual funds or securities should be the last option," said Suresh Sadagopan, a Mumbai-based financial planner. This is because mutual funds are subject to market risks. “Say, you have taken a loan of 60,000 against a mutual fund corpus of 1 lakh. In case the market goes down and the value of the mutual fund corpus dips to 80,000, the bank may ask you to put20,000 to make up for the gap or may sell your mutual fund holding," explains Chawla. Considering loan against mutual funds are secured loan in nature, it is cheap than a personal loan.

Source : Live Mint back