Mutual funds are an excellent tool for building wealth over the long term. They provide diversification and professional management, aiding investors in achieving their financial goals. However, did you know that mutual funds could also be used as collateral for a loan? That’s right; you can borrow money against your mutual funds without selling them. This arrangement allows you to keep your investment portfolio intact while accessing funds for emergencies, home renovations, or any other expenses.
Mutual funds are one of the popular investment options in India. The market for mutual funds continues to grow, and investors are looking for innovative ways to leverage their portfolio for additional liquidity. By borrowing against mutual funds, investors can receive funds at a lower interest rate than most other borrowing options. In this article, we will explain how to borrow against mutual funds and the benefits of utilizing this option.
Loan on Mutual Funds
A loan on mutual funds is a type of secured loan that uses mutual funds as collaterals. In simple terms, lenders disburse loans against the value of mutual funds that the borrower owns. The loan value is generally a percentage of the mutual fund’s net asset value (NAV), depending on the lender’s policy. The lender may require you to pledge a certain percentage of the NAV as collateral for the loan. The loan is then repaid over a fixed period, with interest, after which the lender releases the pledge and returns the mutual fund units.
Loan Against Mutual Funds Interest Rate
Loan against mutual funds interest rate is usually lower than other borrowing options, such as personal loans, credit card loans, and gold loans. The interest rate on the loan varies according to the mutual fund scheme and the lender’s policy. Typically, the interest rate will vary between 9-12%. The lowest interest rates are available for high-value loans with longer repayment periods. Lenders also offer a higher interest rate for loans on mutual funds with a higher risk profile. Interest rates on loan against mutual funds are fixed, which means that they don’t change over the loan’s repayment period.
Benefits of Loan on Mutual Funds
There are several benefits to using a loan on mutual funds, including:
- Lower Interest Rates – As mentioned above, the loan against mutual funds interest rate is generally lower than most other borrowing options. This translates to lower borrowing costs and more money saved over the loan’s repayment period.
- No Need to Sell Mutual Funds – When you take out a loan on mutual funds, you don’t need to sell your mutual funds. By retaining your mutual fund portfolio, you can continue to reap the benefits of long-term investment, such as dividends and capital appreciation.
- Tax Benefits – When you borrow against mutual funds, the loan is considered a secured loan. This means that it is not taxable under the Income-tax Act, 1961. On the other hand, any income generated from selling the mutual funds could be taxable, depending on the holding period.
- Quick and Convenient – Loan on mutual funds is a quick and convenient option, with minimal documentation and processing time. Most lenders offer online applications, which enables borrowers to apply for loans from anywhere and at any time.
- Flexible Repayment Options – Lenders offer flexible repayment options, including the choice of the loan tenure and the option of prepayment. Borrowers can choose a repayment period that matches their cash flow requirements and financial goals.
Loan on mutual funds is a smart borrowing option that allows borrowers to leverage their mutual fund portfolio for additional liquidity. The lower interest rate, tax benefits, and convenience make it an attractive option for a range of borrowers. One thing to consider before taking out a loan on mutual funds is to ensure that the loan is used for essential purposes rather than discretionary expenses. Borrowers should also consider their repayment capacity and choose an appropriate loan tenure. Finally, borrowers should compare different lenders and choose one that offers the best terms and condition and the lowest interest rate. Overall, loan on mutual funds is a robust borrowing option that enables borrowers to tap into their investment potential while retaining ownership of the assets.