Loan Against Mutual Funds: A Strategic Borrowing Guide

Loan Against Mutual Funds: A Strategic Borrowing Guide
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Equirus Wealth

08 Feb 2024 4 min read

Mutual Fund#Mutual Funds

The need for quick access to funds is a common requirement for individuals especially when indulged in investments in financial markets.

While traditional financial instruments like personal loans and credit cards are readily available, they often come with high interest rates that can strain your financial resources. However, there's a lesser-known alternative that allows you to unlock liquidity from your existing investments – Loans Against Mutual Funds (LAMFs).

Understanding mutual funds

Mutual funds serve as investment vehicles that pool money from multiple investors to create diversified portfolios of stocks, bonds, or other assets. This structure enables individuals to gain exposure to a variety of markets without the need for direct management of their investments.

Availing loan against mutual funds (LAMFs)

With LAMFs, individuals can pledge their mutual fund units as collateral and borrow a specified amount against their current market value. This unique financial tool provides a way to access funds without liquidating your investments, potentially allowing them to continue benefiting from market growth.

Key points to remember

AMFI Guidelines: The Association of Mutual Funds in India (AMFI) plays a crucial role in regulating LAMFs, ensuring transparency and investor protection. These guidelines cover eligibility criteria, loan-to-value (LTV) ratios, margin requirements, and other essential aspects.

Digital Convenience: Many lenders offer digital LAMFs, streamlining the application and approval process. These online platforms often require minimal documentation, making the entire experience more convenient for borrowers.

Loan Against ELSS Mutual Funds: Equity Linked Savings Schemes (ELSS) allow LAMFs, albeit with certain restrictions due to their lock-in periods.

Process of loan against mutual funds:

Eligibility Check: Potential borrowers must meet the lender's criteria, which typically consider factors such as credit score, income, and minimum investment value.

Choose Mutual Funds: Select eligible funds from the lender's list and specify the amount you wish to borrow.

Application & Approval: Submit your application either online or physically with the necessary documents. Upon approval, your mutual fund units will be marked as lien.

Funds Disbursement: Once approved, the loan amount will be disbursed to your bank account, providing you with the necessary liquidity.

Repayment: Timely repayment is crucial to avoid penalties or forced selling of your mutual fund units. Adhering to the stipulated timeframe ensures a smooth and disciplined repayment process.

Utilizing loan against mutual funds wisely

Emergency Needs: LAMFs are best suited for unforeseen expenses rather than routine financial obligations. Using them wisely can help you navigate unexpected financial challenges without resorting to high-interest alternatives.

Investment Opportunities: Consider LAMFs as a tool for short-term liquidity needs without having to sell long-term investments at a potential loss. This strategy allows you to maintain your investment goals while meeting immediate financial requirements.

Discipline is Key: Ensuring timely repayments is paramount to avoid accumulating interest burdens and the potential liquidation of your pledged mutual fund units. Discipline in managing the loan ensures a positive financial experience.

Loan against mutual funds interest rate

Interest rates on LAMFs vary based on factors such as the lender, loan amount, chosen mutual fund scheme, and the borrower's creditworthiness. Typically ranging from 9% to 15% per annum, these rates are often lower than those associated with personal loans.

Risk considerations

It's crucial to acknowledge that LAMFs come with inherent risks, such as market fluctuations affecting the value of your pledged units and the potential for forced selling if loan repayments are not met. Before opting for this financial tool, carefully assess your needs and repayment capacity.

By understanding the nuances of Loans Against Mutual Funds and employing them judiciously, you can unlock their potential to meet your financial needs while preserving your long-term investment goals. Remember, informed decision-making and financial discipline are the keys to leveraging these instruments effectively.

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