Taking loan against mutual funds can be a great way to finance your needs while investing, but it is important to know the right time to avail it.
When we talk about stock market investments, it is hard not to include mutual funds in the discussion. The investment instrument gained a lot of popularity recently and is also among the largely preferred investment sources. It is safer than other stock market investments and is also known for high returns. The capital you invest is administered by fund managers who allocate it to the right sources for maximum returns.
Mutual funds can benefit you in other ways as well. If you have a good investment portfolio, you can apply for a loan against it. Banks and NBFCs offer loans against Mutual funds, where your portfolio is kept as collateral with the lender. Since it is a secured loan, its benefits make your borrowing experience less stressful and repayment easy.
Before applying for the loan, you need to understand that your mutual fund units are submitted to the lender as collateral. In case you fail to repay the loan or end up defaulting on payments, the lender has the right to sell those units and retrieve the loan amount. Hence, it is very important that you apply for a loan against mutual funds when you really need it.
When should you apply for a loan against mutual funds?
As an active stock market investor, you might need emergency funds from time to time while trading. However, you need to gauge the perfect time to apply for this financial instrument, or in the worst case, you might end up facing loss on both ends.
According to most experts, there is a certain percentage of loss that you have to check for before applying for the loan. To understand it better, you can refer to this example. Suppose you have invested in equity stocks worth INR 10 lakhs and the stock market trend declines massively the very next day. Since you have shelved such a huge amount recently, the only options you might be left with is either take the loan or drop the stocks.
Before you choose from any of those options, you need to analyse the situation carefully. First, check the amount of loss that you have suffered, if the percentage exceeds above 20-50 per cent, then taking the loan might make sense. As such, small amounts can be paid from the loss bearing equity stock overtime or you can pay it from the profit from other investment sources. On the other hand, if the loss exceeds 50 per cent and above, then the decision depends on your prediction, judgement and experience; because there is a fair chance that you might lose both investments trying to save one.
To understand equity and other investments better or to know more about loan against mutual funds, you can contact our team of experts.