Among other options, you may consider borrowing against mutual fund units as an easy alternative. The advantage here is you don’t have to redeem your units prematurely. This also ensures that your SIP or Mutual Fund Investment continue without hitch.
The process is similar to the overdraft facility that bank accounts offer. You can avail loan against equity or balanced fund by approaching any non-banking financial company (NBFC). The loan will be given based on the value of units in the folio and the tenure you choose (70% in case of Debts Fund and 50% in case of Equity or Balanced Fund).
Interest rates for loans against funds
You can expect to repay the loan at an interest rate of 10-12% on the mutual fund units. Of course, this will be subject to terms and conditions set by the financier and loan tenure. Since it is a secured loan, the interest rate will be much lower than that of unsecured personal loans. Also, if your credit score is good or you have been a longstanding bank customer, the bank manager might agree to lower interest rate even more.
Lien for mutual funds
Before we proceed further with the process to avail this loan, it is important to understand lien on mutual funds. Lien is a document that gives the bank the right to sell the fund or hold it. Hence, when you mark a lien in the name of the bank you grant the bank ownership of the fund units you own.
You need to approach your fund house and ask for a lien on your units in the name of the bank for a lien transfer to the bank. All the unit holders must sign the request letter for lien transfer, who jointly hold the mutual fund.
Benefits of borrowing against mutual fund units
- Loan against mutual funds is a good way to receive instant liquidity against the mutual funds unit you own.
- If you think your mutual fund investment is lying idle, this is a good way to quickly raise capital for short-term financial requirements.
- The interest rates for a loan against mutual funds can be lower than that for personal loan interest rate.
- If you opt for a loan against your mutual fund units you would not have to sell your units hence your financial plan and fund ownership remains intact.
Loans against mutual funds is quite a rare practice due to lack of awareness and information on the subject. So next time you think of alternate ways of raising a contingency fund, remember that a loan against your mutual funds can be a better option than traditional instruments.