In need of emergency cash? Don’t sell your mutual fund units, take a loan against it

In need of emergency cash? Don’t sell your mutual fund units, take a loan against it

New Delhi: Amid the coronavirus crisis, a lot of people have either lost their jobs or have experienced a salary cut. For many, the nationwide lockdown has completely eroded their savings and income. These people are facing severe liquidity issues and cash crunch. Loan EMIs, necessary expenses, utility bill payments have to be done. However, some are witnessing severe cash crunch and are considering liquidating their investment.

People who invest in mutual funds are considering redeeming their mutual fund units to meet their funding requirement. However, there is a better option to make use of MF units. Instead of selling the units prematurely, one can take a loan against mutual funds. Not only will it come at a lower interest rate compared to personal loans, but it will also let you stay invested in the market.

If you do not have an emergency fund to rely on, you can take a loan against your MF units. Many banks and lenders allow customers to take a short-term loan against their mutual fund units. Loan against only qualified funds is provided. The customers have to pledge their mutual fund units to the lender and borrow the money.

How to apply for loan against mutual funds? 

If you hold your units in Demat form and have prior permission then many online portals sanction loans quickly but, if you hold your units in physical form then a proper loan agreement with the financier or bank should be in place. The lender asks mutual fund registrar like CAMS etc. to mark a lien on the number of units being pledged. The registrar then marks the lien and sends a letter to the lender and a copy to the borrower confirming the lien. The lien is marked against the units and not the amount. You cannot redeem the units before you completely repay the loan.

Why take loan against mutual funds?

If you need money for a short period of time like six months or so, you don’t need to sell your mutual fund units. You have the option of borrowing against your mutual fund units. This will help you as neither will you be redeeming your mutual funds nor will you be stopping your systematic investment plan (SIPs).

Advantage of loan against mutual fund: 

One of the biggest advantages of getting a loan against mutual fund is that you don’t have to sell your units prematurely. When you get a loan against mutual funds, it gives you the option to receive immediate liquidity against mutual fund units owned by you. A loan against mutual fund will also help increase the potential return in case your mutual fund investment is lying idle. It will raise capital for short-term requirements as well.

Availability of loan against mutual fund: The amount of money that you can get against mutual fund depends on the type of mutual fund you own. Some banks also have a maximum and minimum cap set on the loan amount that that one can apply for.

Interest rate: Generally, you can expect an interest rate of about 10-11% on the mutual fund units. Although, this will be subject to terms and conditions set by the financier and loan tenure as well. Since it is a secured loan, the interest rate will be much lower as compared to unsecured personal loans. Also, if your credit score is good or you have been a longstanding bank customer, the interest rate could be even less at the bank manager’s discretion.

Lien for mutual funds: Lien is a document that gives the bank the right to sell the fund or hold it. Therefore, when you mark a lien in the name of the bank what you do is, you grant the bank ownership of the fund units you own. In simple words, lien is security which you pledge to the financier when you borrow money against your mutual fund units. This gives the financier the right to hold or sell your units if you are unable to repay.

When can the lien be removed? 

If you have repaid your loan partly then you can enforce a partial removal of lien, which means that some of the units will be freed while the rest will remain under lien till the loan is repaid completely. Once the loan is repaid completely, the financier can send a request to the fund house asking them to lift the lien.

What if you are unable to repay the loan? 

In case you are unable to repay the loan then, the financier has the right to enforce the lien. They can choose to hold your units or they can send a request to the fund house to redeem your mutual fund units in order to recover money.

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Author: Sham