Loans Against Mutual Funds In A Nutshell

What are mutual funds precisely?A mutual fund is an ideal investment channel where the money is pooled in by the investors to serve the purpose of investing in shares and securities of different companies. A small amount in the form of fee is charged by the professional money managers who manage money on their behalf and invest them in order to reproduce capital gains or incomes. Investors are allowed choose a mutual fund scheme depending on their financial goal.Were you aware that investments that were made on mutual funds either through lump sum investments or a systematic investment plan (SIP) can help you with contingency funds? Anyhow liquidating the mutual funds is not the only available option, but is a better option to opt as banks lend up to 50% of the NAV and comparatively the lending interest rates are lower than for personal loans.1)How about borrowing loans against mutual funds?Yes, when there is a requirement of money on an immediate basis for short tenures like three months to a year. A number of investors opt for borrowings against their mutual funds. This can be done like any other loan by pledging mutual funds to banks or financial institutions as a security and borrowing against them. This would work to be a better option in the close future rather than terminating SIPs (Systematic Investment Plan) or redeeming your units. Depending on the type of mutual fund you own, the required money will be lent by the financial institutions.Here are a few questions on all you need to know about loans against mutual Funds:2)How does loan against mutual fund units actually work?The first step is, you can approach a financial institution or a non-banking financial company (NBFC) and make a request for a loan or an overdraft by pledging your mutual fund units. Later, you can obtain a lien on the units in the name of the bank as it would offer the loan based on the value of units held in your mutual fund account.3)How much would it cost?The loan can be paid back to the financier at the agreed interest rate.Depending on the tenure and the quantum of loan lying somewhere around 10-11% of these mutual funds. You are not permitted to switch the units or sell them when they are under lien. Most of the financial planners recommend on not opting loans against liquid or debt-oriented funds but rather to opt for equity oriented mutual funds as you can get as much as 50% on the Net Asset Value of your mutual funds. The banks also have pre-fixed limits on the maximum and minimum loan you can avail against mutual funds.4)How do we apply for loans?If you hold demat units and get a prior approval, it is much easier as the online portals offer loans swiftly. If the same units are held in physical form, there is a need for an execution of loan agreement with the concerned financier. Further, the financier will put in writing to the mutual fund registrar and request them to mark a lien on the number of pledged units. Typically, the financiers extend loans only about 60-70% of the value of pledged units. In turn, the Registrar will mark lien and draft a letter to Financier with a duplicate copy to the investor accepting the marking of a lien on the Units.5)What is lien for mutual funds?Lien is a typical document that allows the bank by giving the right of ownership, to hold or sell the pledged funds. When a mark of lien is done in the favour of the bank, you are shifting the ownership and giving the right of the fund units you own. 6)Can the lien on the mutual fund units be removed? This can be done if the amount is repaid to the borrower, a request letter can be sent to the fund house for the removal of the lien. Or the financier can  make request for partial removal of lien which can happen if the Financiers receive part payments and the removed units are referred as ‘Free’ units.In case there are any defaults by the borrower in making payments, the financier can use the right and enforce the lien.7)What are the basic advantages of loans against mutual funds?The primary benefit is, it provides immediate liquidity against your mutual funds. It is more like an overdraft facility which has a relatively shorter tenure than others and feasible for short-term funds requirements. It facilitates in raising capital swiftly for short-term needs and acts as a monetary tool for those who are finding ways to leverage  their otherwise idle mutual fund investment. Most importantly, your financial plan remains intact as you are not selling your mutual funds and even after you pledge them for a loan, your ownership of fund units is not divested.
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Loans Against Mutual Funds In A Nutshell

Piuesh Daga
Blog
06th Dec, 2017
Loans Against Mutual Funds In A Nutshell

What are mutual funds precisely?

A mutual fund is an ideal investment channel where the money is pooled in by the investors to serve the purpose of investing in shares and securities of different companies. A small amount in the form of fee is charged by the professional money managers who manage money on their behalf and invest them in order to reproduce capital gains or incomes. Investors are allowed choose a mutual fund scheme depending on their financial goal.

Were you aware that investments that were made on mutual funds either through lump sum investments or a systematic investment plan (SIP) can help you with contingency funds? Anyhow liquidating the mutual funds is not the only available option, but is a better option to opt as banks lend up to 50% of the NAV and comparatively the lending interest rates are lower than for personal loans.

1)How about borrowing loans against mutual funds?

Yes, when there is a requirement of money on an immediate basis for short tenures like three months to a year. A number of investors opt for borrowings against their mutual funds. This can be done like any other loan by pledging mutual funds to banks or financial institutions as a security and borrowing against them. This would work to be a better option in the close future rather than terminating SIPs (Systematic Investment Plan) or redeeming your units. Depending on the type of mutual fund you own, the required money will be lent by the financial institutions.

Here are a few questions on all you need to know about loans against mutual Funds:

2)How does loan against mutual fund units actually work?

The first step is, you can approach a financial institution or a non-banking financial company (NBFC) and make a request for a loan or an overdraft by pledging your mutual fund units. Later, you can obtain a lien on the units in the name of the bank as it would offer the loan based on the value of units held in your mutual fund account.

3)How much would it cost?

The loan can be paid back to the financier at the agreed interest rate.Depending on the tenure and the quantum of loan lying somewhere around 10-11% of these mutual funds. You are not permitted to switch the units or sell them when they are under lien. Most of the financial planners recommend on not opting loans against liquid or debt-oriented funds but rather to opt for equity oriented mutual funds as you can get as much as 50% on the Net Asset Value of your mutual funds. The banks also have pre-fixed limits on the maximum and minimum loan you can avail against mutual funds.

4)How do we apply for loans?

If you hold demat units and get a prior approval, it is much easier as the online portals offer loans swiftly. If the same units are held in physical form, there is a need for an execution of loan agreement with the concerned financier. Further, the financier will put in writing to the mutual fund registrar and request them to mark a lien on the number of pledged units. Typically, the financiers extend loans only about 60-70% of the value of pledged units. In turn, the Registrar will mark lien and draft a letter to Financier with a duplicate copy to the investor accepting the marking of a lien on the Units.

5)What is lien for mutual funds?

Lien is a typical document that allows the bank by giving the right of ownership, to hold or sell the pledged funds. When a mark of lien is done in the favour of the bank, you are shifting the ownership and giving the right of the fund units you own.

6)Can the lien on the mutual fund units be removed?

This can be done if the amount is repaid to the borrower, a request letter can be sent to the fund house for the removal of the lien. Or the financier can  make request for partial removal of lien which can happen if the Financiers receive part payments and the removed units are referred as ‘Free’ units.

In case there are any defaults by the borrower in making payments, the financier can use the right and enforce the lien.

7)What are the basic advantages of loans against mutual funds?

The primary benefit is, it provides immediate liquidity against your mutual funds. It is more like an overdraft facility which has a relatively shorter tenure than others and feasible for short-term funds requirements.

It facilitates in raising capital swiftly for short-term needs and acts as a monetary tool for those who are finding ways to leverage  their otherwise idle mutual fund investment. Most importantly, your financial plan remains intact as you are not selling your mutual funds and even after you pledge them for a loan, your ownership of fund units is not divested.

Piuesh
Blog Author

Piuesh is the cofounder of White Matter Advisory and is responsible for the overall delivery and execution at WMA. He profoundly believes in significance of financial literacy in emerging markets. He is the youngest amongst the co-founders with an overall experience of 7+ years in the banking industry.

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