When you apply for a Loan against mutual funds, there are some things that you need to know.
In the past few years, the investment landscape of stock markets around the world has changed drastically. This is because of the younger generation’s increased awareness about stock market investment. Nowadays, people in India are also investing in equity and bonds instead of FDs and Gold. From providing high returns in a short period of time to limitless investment amount, stock market investments are beneficial in many ways.
Stock market investments are also termed as ‘risky investments’ as its returns are dependent on volatile market conditions. To gain the desired from stock market investments, you need to have experience and knowledge of the stock market.
Mutual funds, on the other hand are known as low risk investments which are basically for novice investors. The units are managed by fund managers, who with their expertise and knowledge, invest and exit from deals for maximum profit. When you invest in multiple mutual funds, your various investments are cumulatively known as a portfolio.
Banks and NBFCs also offer loans on mutual fund portfolios. Loan against mutual funds takes your investment portfolio as collateral, and based on its value, you get a loan from the bank. With many lenders offering this perk, people are considering it as a viable option. There are some lesser known facts about loan against mutual funds which might help you in the long run.
- Loan amount: When you apply for a loan against your mutual fund portfolio, the lenders first review your investment portfolio and then provide you the loan. Most lenders offer loan amount which is 60-80 per cent of your entire portfolio valuation.
- Numerous factors: To approve a loan, the lender set an approval parameter also known as eligibility. The applicant’s database is then valuated, to see if he/she qualifies these parameters. The factors included in this parameter include tenure of the loan, credit score of the applicant and the extent of the margin.
- Unit ownership: When you pledge your mutual fund portfolio for a loan, you transfer partial ownership to the lender. Doing so, you lose the authority to sell the units or trade with the same. These units can only be redeemed once you have repaid the loan.
- Loan retrieval: Since mutual fund units are pledged as collateral with the lender, the lien signed by you and the lender gives him the authority to sell the units for loan retrieval. So, if you default on the EMIs despite repeated reminders, you might lose your funds.