Loan Against Mutual Funds: A Comprehensive Guide
Taking a loan against mutual funds is a financial strategy that allows investors to leverage their investments to meet urgent financial needs without redeeming their units. This method is becoming increasingly popular due to its flexibility, lower interest rates compared to personal loans, and the ability to continue benefiting from potential market gains.
What is a Loan Against Mutual Funds?
A loan against mutual funds is a type of secured loan where the borrower pledges their mutual fund units as collateral to the lender. The amount that can be borrowed depends on the value and type of mutual fund units pledged. Both equity and debt mutual funds can be used as collateral, though the loan-to-value ratio may vary.
Key Features
Loan Amount: The loan amount typically ranges between 50% to 70% of the Net Asset Value (NAV) of the mutual fund units pledged. For equity funds, lenders might offer up to 50% of the NAV, while for debt funds, the ratio can go up to 70%.
Interest Rates: Interest rates for loans against mutual funds are generally lower than those for personal loans. They can vary depending on the lender, the type of mutual fund, and the loan amount.
Tenure: The loan tenure can range from a few months to a few years, depending on the lender's policies and the borrower's agreement.
Repayment: Borrowers can repay the loan in Equated Monthly Installments (EMIs) or as a lump sum. The flexibility in repayment options makes it a convenient choice for many borrowers.
Ownership: Even though the mutual fund units are pledged, the borrower retains ownership and continues to receive dividends and capital gains.
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