Many individuals include mutual fund schemes as a significant part of their investment portfolio.
As a result, lenders are actively offering loans against these funds. Recent reports from Economic Times indicate that accessing these loans has been made simpler, with lower interest rates compared to personal or gold loans.
Both public and private banks offer this type of loan, but non-banking finance companies (NBFCs) have been particularly aggressive in providing these services.
The key attraction of this loan is that investors can meet their minor financial needs without selling their profitable schemes.
Loan up to 50% of Scheme Value
For equity mutual funds, borrowers can avail loans of up to 50% of the scheme value.
The interest rate charged by NBFCs ranges from 9-10%, depending on the individual’s credit score.
In comparison, loans against gold come with rates ranging from 9-24%, while personal loans have interest rates of 10-18%.
Most loans against mutual funds have a 12-month tenor, with a minimum loan amount of ₹10,000 and a maximum limit of ₹1 crore.
Simplified Process
Lenders have streamlined the borrowing process for mutual funds, making it digital and user-friendly.
Generally, interest is charged only on the utilized amount for the number of days it is used, and there are no EMIs involved.
Borrowers can repay the loan anytime during the one-year tenure and even have the option to renew the loan after one year.
Financial experts suggest that this type of loan can effectively cover needs such as medical emergencies.
Beware of Potential Losses
However, one major drawback of these loans is that borrowers may have to top-up in case of a significant stock market decline.
This means that the lender may require the borrower to cover the depreciation in the value of the equity mutual fund.
Caution in Seeking Advice
Experts like Vidya Bala, Co-Founder of PrimeInvestor, advise investors to be cautious when receiving recommendations for such loans.
It’s essential to ensure that there are no hidden motives behind the advice given, as some parties, such as asset management companies or distributors, may have their interests at stake.
