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All You Need to Know About Loan against Mutual Fund

We’ve all come in a situation at some part of our lives when we are in absolute need of money at the time of some financial crisis. During this time, any person who hasn’t ready for a situation like this can find himself in a tough position to manage money in a short period of time. This is what happens to a person hasn’t given much importance to financial planning. Furthermore, when you are in urgent need of funds, it is not easy to fulfil the eligibility criteria to take loans, plus plenty of other things. Real-estate and some other securities are low-liquid assets which make it difficult to take a loan against them. But, now you can fasten the process on loan against your own securities by taking a loan against mutual fund investments. If you are in need of some sort of emergency funds, you can take a loan against mutual funds.

Availing Loan against Mutual Funds

One can fulfill his/her budgetary requirements without discontinuing the investments through availing loan against financial securities like a mutual fund. To do so, you will have to approach a non-banking financial company (NBFC) or bank to avail loan against your mutual fund irrespective whether you have equity mutual fund or balanced mutual fund. You will pledge your mutual fund units as security for the debt and the loan amount and tenure will depend upon the value of your mutual fund units.

In this way, you will not have to compromise in value while pledging security at the time of taking a loan. Also, the interest rate is lower compared to personal loans near around 10-11 per cent on the mutual fund units. However, it will be subject to terms and conditions but if your credit score is good and have a good longstanding track record, the interest might get even lower.

Lien for Mutual Funds

Before we go any further, it would be wise to understand the lien for mutual funds. It is a document that gives the bank the right to sell or hold the fund. Once you marked the lien while availing loan against your mutual fund, you cannot sell the fund. It is because you will mark lien under the name of the bank which you grant the owner of the fund you own. If the fund has multiple holders then all unitholders will have to sign the request letter for lien transfer.

How to Apply for Loan against Mutual Fund?

The loan against mutual fund can be availed via online and offline modes. If the units of a mutual fund are in the Demat form, you can go for online mode but if you have units in physical form, you can go for offline mode. The loan amount will depend upon your mutual fund. For instance, the loan amount against equity mutual funds is generally low. It is because of the volatility in the equity market. If the stock market crashes, the equities within your mutual fund may decrease in value however the debt funds are quite stable and can provide with you the good loan amount.

Once the loan is fulfilled, the lien will be lifted and you will have the full control over the units of your mutual fund. But, you cannot redeem the units until you pay the full loan amount.

Taking a loan against mutual fund is a good way to raise capital with your existing mutual fund investments without compromising its future value. Plus, the units will be intact and you won’t have to sell it.

Hope, the information we provided helped you. Nevertheless, if you have any query or would suggest something that we missed then feel free to mention in the comment section below.

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