Investing in mutual funds is one of the popular methods of achieving long-term financial goals. It offers plenty of benefits, including diversification, professional fund management, and potential returns. But did you know that you can also use your mutual fund holdings to secure a loan? This article will discuss loan on mutual funds and provide valuable insights on how you can secure such a loan using your mutual fund investments.
What is a Loan on Mutual Funds?
A loan on mutual funds, also known as a loan against mutual funds, is a type of loan where you can pledge your mutual fund units as collateral to get a loan from a financial institution. This loan can be obtained for various purposes, such as funding your child’s education, buying a property, or starting a business. This type of loan is also referred to as a secured loan because you are offering your mutual fund units as collateral to the lender.
Benefits of Getting a Loan on Mutual Funds
Quick Processing Time: Loan on mutual funds typically has a fast-processing time compared to other loans. Since you are pledging your mutual funds as collateral, the lender can easily assess the value of the collateral, which speeds up the loan processing time.
Lower Interest Rate: Another benefit of getting a loan on mutual funds is that it typically comes with a lower interest rate compared to unsecured loans. This is because the loan is secured, and the lender has the mutual fund units as collateral to recover their investment in case of default.
Maintain Investment Portfolio: By taking a loan on mutual funds, you can maintain your investment portfolio and still meet your financial needs. This is because you don’t need to liquidate your mutual fund holdings to get a loan, which helps you maintain your investment strategy.
Tax Benefits: Some lenders offer tax benefits on loans on mutual funds. This means that the interest paid on the loan can be claimed as a deduction from your taxable income, reducing your tax liability.
Factors to Consider Before Applying for a Loan on Mutual Funds
Before applying for a loan on mutual funds, you should consider the following factors:
Loan Amount: Depending on the lender, the loan amount may range from 50% to 80% of the mutual fund value. You should determine your financial requirements and apply for a loan amount accordingly.
Interest Rate: The loan against mutual funds interest rate varies from lender to lender. You should compare the interest rates offered by different lenders and select the one that offers the lowest interest rate. However, interest rate should not be the only factor considered while selecting a lender.
Tenure: The loan tenure may range from one year to several years, depending on the lender. You should select the tenure based on your repayment capacity and financial goals.
Loan Processing Fees: Some lenders charge a processing fee for loan on mutual funds. You should consider the processing fees while selecting a lender to avoid any surprises later.
Steps to Secure a Loan on Mutual Funds
To secure a loan on mutual funds, follow these steps:
Step 1: Eligibility Check
Check the eligibility criteria of the lender before applying for a loan on mutual funds. Typically, lenders require the following:
Applicant should be at least 18 years old
Applicant should be an Indian citizen
Applicant should have a regular source of income
Step 2: Documentation
Gather all the required documents, such as: KYC documents
Investment statement showcasing mutual fund holdings Income proof and ITR documents
Step 3: Loan Application
Once you have gathered all the documents, fill out the loan application form and submit it. You can apply for a loan on mutual funds online or offline, depending on the lender.
Step 4: Mutual Fund Valuation
The lender will evaluate the mutual fund units to determine the loan amount you are eligible for. The lender may accept mutual funds from select mutual fund houses and reject others based on past performance and other criteria.
Step 5: Loan Approval
If the lender is satisfied with the collateral value and your eligibility, they will approve the loan and disburse the funds to you.
Securing a loan on mutual funds is a convenient and cost-effective way to meet your financial needs while maintaining your investment portfolio. However, it is essential to carefully evaluate the loan against mutual funds interest rate, eligibility criteria, and other factors before applying for a loan. It is also important to ensure that you are taking a loan only when it is necessary and not to indulge in frivolous expenses.