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This article is more than 1 year old.

How to take a loan against your mutual fund investment

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The loan against mutual fund units is done in the form of an overdraft facility and the interest is charged on the amount availed as the credit.

How to take a loan against your mutual fund investment
The banking sector has transformed considerably over the last few years, and now they even issue loans against mutual fund (MF) investments. The loan amount, in this case, largely depends on the value of the mutual fund units to be used against the loan. The loan against mutual fund units is done in the form of an overdraft facility and the interest is charged on the amount availed as the credit.
Here are the key things to know about loan against MF:
How to apply?
The investor can apply to the bank or financial institution for a loan against the mutual fund units he or she holds. The loan can be received against equity or hybrid mutual funds by approaching any bank or non-banking financial company (NBFC). It can be done in online or offline mode.
"The lender does the due diligence, which involves research on the credit score, assessing the value of units, and determining the loan amount eligibility based on these," according to BankBazaar, a marketplace for financial products.
According to Harsh Jain, Co-founder and COO, Groww - an online investment platform, "The loan amount that the investor receives is subject to the category of mutual fund he/she invested in and is usually a percentage of the prevailing Net Asset Value (NAV) - ranging anywhere between 50-75 percent." The interest rate at which the loan has to be repaid is also subject to the initial terms and conditions agreed upon by the borrower and the bank.
The application process also involves marking of lien on the mutual fund units in favour of the bank/financing institution. Once a lien is marked, the units cannot be sold or redeemed by the investor. The lein is a permission given by the investor in writing to the bank that allows the bank ownership of the fund units.
"This can be thought of as pledging funds as security or collateral till the time the loan is paid. The lien can be lifted on request once the loan has been paid," explained Jain of Groww.
Advantages of taking loan against mutual fund
Archit Gupta, Founder and CEO of ClearTax, says the best thing about loans against mutual fund investments is that the investors still enjoy the dividend payouts despite the units being marked with the lien.
"As investors’ mutual fund units secure these loans, they are issued at a lower interest rate," he said.
The loan against mutual funds can help in raising money for exigencies in short-term against own units which is a great facility. Investors are not required to redeem units prematurely. This also ensures that Systematic Investment Plan (SIP) can continue without any hitch.
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