How Mutual Fund Investment Can Help You During Emergencies

Preparing for emergencies is the first step in any financial plan. Having a certain amount of money parked in a savings account or liquid fund can help to tide over difficult scenarios. However, sometimes, the emergency fund may not be enough. And, you might have to borrow money. And loan against collaterals can be helpful to tide over such a situation.

You must know you can take a loan against gold or property. But did you know you can take a loan against your mutual fund investment? In this blog, we will look at loans against mutual funds.

What is a loan against a mutual fund?

A loan against a mutual fund is just like the other loans backed by collateral. In this case, the collateral is your mutual fund investment. A financial institution such as bank marks a lien against your mutual fund units and disburses the loan amount. Once they mark the lien, the bank will have ownership of your fund units. One should remember that the bank keeps a lien against your mutual fund units and not your investment amount or the current value of your investment. So, once the lien is marked, you don’t have access to your units. This means that you can’t redeem those units until you repay the loan.     

And just like other loans, banks will decide the amount of loan based on your number of units, type of mutual fund and loan tenure.

The lien gets removed as you repay the loan.

How can I apply for a loan against mutual funds?

Nowadays, most banks offer instant loans against mutual funds, similar to their overdraft facility.

You will have a loan agreement with the bank. The lender instructs a mutual fund registrar, such as CAMS or Karvy to place a lien on the quantity of pledged units. The registrar then stamps the lien and sends a letter to the lender, with a copy to the borrower, confirming the claim.

Things to keep in before borrowing against your mutual fund units

You can borrow against different types of mutual funds such as equity funds, debt funds and hybrid funds. However, the loan that you can get depends on the type of mutual fund. Different banks will have different criteria. For example, we can borrow up to 50% of your mutual fund value with equity funds and 80% with debt mutual funds. 

There will be a minimum and maximum amount that you can borrow against your fund units. This amount will differ among banks.

Banks may not offer loans against every mutual fund. Each bank has an approved list of mutual funds. E.g., ICICI Bank offers loans against mutual funds registered with CAMS.

Advantages of borrowing against mutual fund

Instead of selling your mutual fund units, taking a loan against a mutual fund can be a better option. Here are some advantages of taking a loan against mutual funds.

Tide over an emergency:  This is especially useful during a crisis because you can pledge your mutual fund units and instantly get the money into your bank account.

Fulfil short-term financial needs:Loans against mutual fund can be a unique way to raise funds for short-term financial needs. You can borrow money against your MF units for a short period and repay it over time without jeopardising your mutual fund unit ownership.

Low interest rate: Interest rates on loans secured by mutual funds may be cheaper than those on unsecured loans, such as personal loans.   

Your units stay invested: You won’t have to sell your mutual fund units if you take out a loan against them. The mutual fund units that have been pledged will remain invested and generate returns. This ensures that your financial plan and investment ownership remain intact.

Only pay interest on the utilised amount: When you take loans against mutual funds, you only pay interest on the amount credited to your account and not the total loan amount guaranteed from your mutual funds.

Conclusion:

Even if you have money in your bank account, you may need to take out loans for several reasons. It’s because of certain unexpected expenses that may require a loan. You can borrow money against mutual funds if you invest in them. This will help you meet your financial obligations while also ensuring that your investments continue to generate returns.

This blog is purely for educational purpose and not to be treated as a personal advice. Mutual fund subject to market risks, Read all scheme related documents carefully.