A lot of individuals are attracted to mutual funds as an investment where they can garner good returns and at the same time spread out risk. However, there are times when investors want or need access to their money within a short period and may not have an interest in offloading mutual fund shares. In such cases, they can borrow money against their mutual funds. This means they still can get their own money to use and let the investment continue to grow.
What is a Loan Against Mutual Funds?
A loan against mutual funds is a way to borrow money from a financial institution using your investments in the form of mutual funds as security. This way you still own your mutual funds and can take advantage of growth on them as well as earnings, but at the same time move into cash when necessary.
Benefits of Loan Against Mutual Funds
- Retain Investment Value: When you take a loan against mutual funds, it is important to note that no capital gains tax or future growth opportunity is lost. You are not converted to cash since you continue holding the mutual fund units. Meaning, your investments can be appreciated over the years.
- Loans with Mutual Funds are Not Rigid: The mutual fund loan typically allows you to pay your loans on the term of your choice. By doing so, you can save yourself some money and make loan payments that suit your financial circumstances.
- Impressive Interest Rates: A bank or any other lender will also offer a good interest rate if you take out loans against mutual funds. That makes them less expensive for when you need a loan as compared to unsecured loans or credit cards.
How to Take Loan Against Mutual Funds
- View the Collection of Your Mutual Fund: Before you apply for a loan, see how much your mutual funds are worth. Lenders use this to determine your borrowing limit. Banks allow a loan-to-value (LTV) of around 50%-80% on your mutual fund units.
- Check Lender Criteria: Every bank has its criteria for giving a loan on mutual funds. Typically, they require you to have a slight amount of funds invested in mutuals, an excellent credit score, as well as steady income. This means you would be well-advised to check that list of rules before going anywhere.
- Choose a Reputable Lender: Research and shop around for the right terms on mutual fund loans. Some aspects to consider would be the interest rates, term of the loan in years, fees for processing, and customer services or inclinations. Traditional lenders…traditional words for lending money are banks, NBFCs, and organizations providing loans.
- Submit Your Application: Once you select a lender, sign the loan application. You’ll have to provide information about your mutual fund investments, your financial situation in general, and some identification papers. The lender will evaluate your application and lend you a certain amount based on the market value of mutual fund units held by you.
- Give Collateral: Once your loan is approved by the lender, you need to give mutual fund units as collateral. The process entails transferring the units to the custody of, or creating a lien in favor of, the lender. The mutual funds would remain in your title nonetheless the lender can have a legal right to them until you repay the loan.
- Accept the Loan: Once you have locked your collateral, lenders will wire over the amount approved to your bank account. The lender wires the money to you, allowing quick access to your funds.
- Repay the Loan: Follow up with all your repayments that you had accepted. The key, of course, is to pay on time — else you may end up having to bear the fines or, worse, redemption of your mutual fund units. Track your repayments and manage this loan with a proactive relationship with the creditor.
Here are some things to consider before you take out a loan against mutual funds
- How It Impacts Investment Growth: When it comes to borrowing loans with your mutual funds as collateral, this will affect their growth rather unconventionally. Furthermore, should your investments decrease in value, you could find yourself having problems repaying the loan or it may even impede your financial well-being as a whole.
- Interest rates and some additional costs: Loans secured by pledging your mutual funds tend to offer a good rate, but there are often hidden fees/charges that make borrowing more expensive than anticipated.
- LTV Ratio: It indicates how much you can borrow against the value of your mutual fund. A lower LTV ratio can be a problem as you have to pay more securities so that the amount of the loan gets increased only when there is an increase in your mutual funds’ prices.
- Repayment Terms: Look at repayment terms and check that they are appropriate for your financial situation. Consider the loan period, size of payments, and available methods of repayment.
- Tax Implications: A loan against mutual funds does not lead to immediate tax repercussions, however, you must evaluate the impact in the long term. This is an area you need to talk through with your finance planner as it fits into the grand scheme of where you are and what every option does for money planning.
Conclusion
In brief, borrowing against mutual funds without selling them gives a very good method of accessing finance while still having all your financial investments in place. Discover the process, benefits, and considerations so you can make an informed decision for your financial goals. Be sure to consult financial professionals and shop around for lenders who may be right for your situation. Borrowing against mutual funds can serve as a useful tool in your financial toolbox if it is managed and wisely planned correctly.
