Should you take a loan against mutual funds? Check details before opting

Loan against mutual funds is a financial solution that allows you to create an overdraft facility against your mutual fund units

If you need funds urgently, don't redeem your mutual fund units. One option that can help you in your need is taking a loan against mutual fund investments. Here is more about this funding option.

 

Understanding loans against mutual funds (LAMF)

 

It is a loan where mutual fund units are pledged as collateral. The borrower continues to earn returns on the pledged units while gaining access to funds. This facility is offered by banks and non-banking financial companies (NBFCs).

 

It is important to note that not all mutual fund schemes are eligible for LAMF. Banks and NBFCs have lists of mutual fund schemes that will be accepted as collateral. Once you avail of the loan on securities, pledged shares or mutual fund units are under lien. You can't take any trade or sell calls until you repay the loan.

 

Benefits of taking loans against Mutual Funds

 

Retain investment growth potential: By opting for a loan instead of redeeming your mutual fund units, you can continue to benefit from potential market appreciation and compound growth.

 

Lower interest rates: Compared to unsecured personal loans, LAMFs have lower interest rates due to the collateral.

 

Quick and easy process: The approval and disbursement process is faster than traditional loans, as the lender already has a clear picture of the collateral value.

 

Many lenders offer flexible repayment terms, allowing borrowers to align repayments with their cash flow.

 

Most lenders allow borrowers to repay LAMFs early without additional costs.

 

Drawbacks of taking loans against mutual funds

 

While the loan is active, you may face limitations on selling or switching your pledged mutual fund units.

 

Despite lower rates than unsecured loans, you still incur interest charges, which can impact your overall financial picture.

 

Potential tax implications: Depending on your jurisdiction, there may be tax implications associated with taking a loan against mutual funds.