Everything You Should Know About Loan against Mutual Funds
A person can avail loans from banks or NBFCs by opting for a loan against mutual funds instead of a personal loan which are available at a higher interest rate comparatively.
Investment planning is a requisite activity under personal finance management and many have been reaping the benefits of investing in Mutual Funds. However, not many are aware of the provision wherein an individual can avail loan against the Mutual Funds. These types of loans are short term and can be effectively used during any emergency situation.
A person can avail loans from banks or NBFCs by opting for a loan against mutual funds instead of a personal loan at a high interest rate. Read further to know everything about loan against mutual funds.
Types of Mutual Funds:
- Equity Funds
- Debt Funds (Income Funds)
- Diversified Funds (Balanced or Hybrid Funds)
- Gilt Funds
- Money Market Funds
- Sector Specific Funds
- Index Funds
Why Loan Against Mutual Funds (LAMF)?
Loan against Mutual Funds offers the opportunity of receiving immediate liquidity against the mutual fund units one owns. This is essentially an overdraft facility for short-term monetary requirements, with a relatively shorter tenure than other loans. Importantly, onedoes not need to sell owned mutual fund units, nor is the ownership of the fund units divested after pledging them for a loan. In order to avail LAMF, the borrower must request the Mutual Fund Registrar to mark a lien against the mutual fund units.
What is lien against Mutual Funds?
Lien is a document that gives the bank the right of ownership to hold or sell the funds. This means that when an individual provides a lien in favour of the bank, the individual is giving the bank the right of ownership of the mutual fund units owned.
To request for a lien transfer to the bank, one will have to approach the mutual fund house and request for a lien on the owned units in favour of the bank. The request letter for the lien should be signed by all unit holders if mutual fund is jointly held.
What will be the sanctioned loan amount?
First and foremost, the amount of loan sanctioned depends on the type of mutual fund. If it is equity mutual funds, one will be able to avail a loan which is as high as 50% of the NAV (Net Asset Value) of the fund. Equity funds are in nature volatile and a drop in its value is a possibility due to a stock market crash. In such a scenario, more number of equity mutual fund units will have to be pledged to cover up for a shortfall. While, loan provided against debt mutual funds is higher than 50% of the NAV (Net Asset Value) of the pledged fund. Also, many a times, banks have the right to decide the amount it would lend against mutual fund investments. The minimum loan amount is Rs 1 lakh and the maximum amount is Rs. 20 lakh.
The Banks will accept MFs that are listed in the Stock Exchanges or offers repurchase facility for the units of mutual fund at the time of lending.
The MF units should have completed the minimum lock-in-period stipulated in the relevant scheme.
The loan amount is based on the Net Asset Value (NAV) / repurchase price or the market value, whichever is less and not to the face value.
As per RBI guidelines, advance against units of mutual funds (except units of exclusively debt oriented funds) would attract the quantum and margin requirements as applicable to advance against shares and debentures. However, the quantum and margin requirement for loans/ advances to individuals against units of exclusively debt-oriented mutual funds may be decided by individual banks themselves in accordance with their loan policy.
The bank will not provide loans for subscribing to or boosting up the sales of another scheme of the mutual funds or for the purchase of shares / debentures / bonds etc.
Will bank charge interest rate on LAMF?
Yes, but interest rates charged are usually lower than that of a personal loan. It could be 10-13% a year, depending on the bank and the mutual fund investments pledged. Also, interest charges are applicable only for the period that the money is utilised, and only for the amount that is drawn on. Hence, the interest is calculated on a daily basis and debited to the current account that is opened by the bank solely for this purpose, at the end of the month.
What is the loan tenure?
The bank or NBFC offer the facility for an initial period of one year. Once the term ends, the account is reviewed and on the basis of outcome of review, the period will be further renewed for another year. The later is executed unless it is specified otherwise in writing.
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