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Loans against mutual funds are disbursed swiftly by banks and Non-Banking Financial Companies (NBFCs).
Loan amount depends on mutual fund portfolio value.
In times of financial emergency, raising funds through a loan against mutual funds can be a more advantageous option compared to taking an instant loan. The primary benefit lies in the fact that interest rates on loans against mutual funds tend to be lower, while you retain complete control over your assets.
Mutual funds, traditionally viewed as a safe and effective investment avenue, not only offer long-term wealth creation but also provide valuable insights into market dynamics. While they are primarily designed to grow your savings, mutual funds can also serve as collateral for securing a loan, especially in urgent situations.
Loans against mutual funds are disbursed swiftly by banks and Non-Banking Financial Companies (NBFCs), making them an attractive option for those who require quick access to funds. The loan amount is typically determined based on the market value of your mutual fund portfolio.
The approval process for such loans is notably faster because the paperwork involved is minimal, and the pledging process can be completed digitally. As a result, the entire loan disbursement process is expedited.
The loan amount you are eligible for depends on the type of mutual funds you hold. For instance, loans against equity funds tend to have lower limits, while loans against debt funds may allow for higher amounts.
One of the standout benefits of this type of loan is that, even though your mutual funds are pledged as collateral, you continue to hold them. This means you can still receive any dividends or interest accrued on these funds during the loan tenure.
Advantages of Loans Against Mutual Funds
- Lower Interest Rates: Since the loan is secured by your mutual funds, which are viewed as relatively safe by lenders, the interest rates on these loans are generally lower than those on unsecured personal loans.
- Flexibility: These loans can be utilised for a wide range of personal expenses, providing significant flexibility to the borrower.
However, despite the many advantages, there are certain risks involved that borrowers should be aware of.
Risks and Considerations
- Market Volatility: The value of mutual funds fluctuates with market conditions. If the market experiences a downturn, the value of your pledged mutual funds may decline, which could affect the loan-to-value ratio. In such cases, the bank or NBFC may require additional collateral to secure the loan.
- Loan Repayment: If you fail to repay the loan, the lender has the right to sell the pledged mutual funds to recover the outstanding loan amount. This could result in the loss of your investment, especially if market conditions are unfavourable at the time.
- Limited Loan Amount: While loans against debt funds can offer higher amounts, loans against equity funds may not always be sufficient if you require a larger sum. In such cases, other forms of collateral may be necessary.
Taking a loan against mutual funds can be a prudent financial decision, provided that you carefully manage your finances and repayment obligations. With lower interest rates, quick approval processes, and the flexibility to use the funds for various personal expenses, this option offers an efficient solution in times of need.
