Loan Against Mutual Fund

Loan Against Mutual Fund

A financial crisis, small or big, can occur at any time. It often happens that investors require money in a short period. Even if not all mutual funds offer high liquidity, you can use them as security to avail loans from banks. Among other options, you may consider borrowing against mutual fund units as a natural alternative.

The advantage here is you don’t have to redeem your units prematurely. This also ensures that your Systematic Investment Plan (SIP) can continue without a hitch. The process is similar to the overdraft facility that bank accounts offer. You can avail loan against equity or hybrid mutual funds by approaching any non-banking financial company (NBFC) or bank.

Lien for mutual funds

Before we proceed further with the process to avail this loan, it is essential to understand lien on mutual funds. Lien is a document that gives the bank the right to sell the fund or hold it. Hence, if you mark a claim in the name of the bank, then you grant the bank ownership of the fund units you own.

You then need to approach fund house and ask for a lien on your units in the name of the bank. All the unit holders must sign the request letter for lien transfer.

Benefits of Borrowing against Mutual Funds

  • Loan against mutual funds is an excellent way to receive instant liquidity against the mutual fund units you own.
  • If you think your mutual fund investment is lying idle, this is an excellent way to raise capital for short-term financial requirements quickly.
  • The interest rates for a loan against mutual funds can be lower than that for personal loan interest rate.
  • If you opt for a loan against your mutual fund units, then you would not have to sell your units hence your financial plan, and fund ownership remains intact.