Mutual fund investments can not only benefit you with the returns but also with getting a loan during financial crisis.
Investments can help us in many ways. Some investments help us finance our needs while others make our lives easier. There are many investment sources in the market such as Gold, Fixed Deposit and stock market. Some people also consider real estate investments, but with skyrocketing prices, buying a plot is mostly a one-time affair. However, in times of crisis, people tend to liquidate these assets to fund their financial needs, but if you have invested in Mutual funds, there is a way to avoid losing them i.e. Loan against securities.
What is loan against Mutual funds?
Loan against mutual funds is a type of loan that an applicant can avail by keeping their mutual fund units as collateral. The procedures of this loan are similar to that of an overdraft facility offered by the banks. You can apply for a loan with equity or hybrid mutual funds units by approaching any bank or NBFCs. The amount of loan you get is based on the valuation of the mutual fund units you own.
Most of the times, the interest rates levied on the loan is a matter of concern for applicants. Loan against mutual funds can be a reliever for such applicants, as they have lower interest rates than unsecured loans. The interest rate for loan against mutual funds is around 10-11 per cent, and if you are among the loyal customers, there are chances that the interest rate might decrease further.
How to apply for loan against mutual funds?
If you are familiar with the loan application procedures, then applying for a loan like this will be an easy task. Around 80 per cent of the loan procedure is similar to the other loans, except for some parts which you might not be familiar with –Lien addition.
Before we move further, it is important to understand the lien on mutual funds. To put it in simple words, the lien is a document which has to be signed by the applicant. By signing the lien, you transfer the holding rights of mutual fund units to the bank or the NBFC. The process to add lien on your mutual fund unit might take a little time. Firstly, you have to approach the fund house to provide you with the mutual funds units on your lien which will be later transferred to the lender. The fund house will then provide you with a request letter that has to be signed by all the unit holders in the mutual fund.
Once you get the lien document, the lender will then mark the lien on the units, as pledged with the help of registrars like CAMS or Karvy. To complete the process, registrar will mark the units and send a lien confirmation letter to the lender.
How to end the loan?
To end the loan, you have to make sure that you repay the entire loan amount. Furthermore, you have to ensure that the lien on the mutual fund units is removed. To remove the lien, the lender will send a letter to the mutual fund house to raise the lien. If you wish to pay a partial amount, you can also choose to raise the lien partially. Defaulting on such loan can have consequences, in the worst case, the lender will send a letter to the fund house to redeem the mutual fund units and retrieve the loan amount.
To understand equity and other investments better or to know more about loan against securities, you can contact our team of experts.