There is no doubt that mutual funds are the current big thing when it comes to investments. From young earners to the pensioners, this interesting and well diversified product serves a purpose to all. Wealth has not only been created, but is also protected from the vicious income tax sections. It wouldn’t be too much to say that it is one product that can make everyone happy: investor, distributor, fund house, stock market and the bond market.
When it comes to financial instruments, a crucible test is putting them as collateral against a loan. For any lender, accepting a financial instrument as a collateral is directly related to the risk that the instrument is exposed to.
Proportional to the risk is the haircut (margin) that is taken on these instruments. For example, the maximum amount of loan that can be granted by keeping equity as a collateral is usually not more than 60% of its average price over a year. Whereas, a fixed deposit can get you a loan of upto 90% of its deposit value.
But what happens when it comes to mutual funds? Is it easy to pledge mutual funds to avail a loan? One thing evident is risk measurement techniques to assess a mutual fund’s haircut proportion is far more complicated than that of stocks or fixed deposits.
Why is that so? Simple!! The variety of mutual funds that exist is plenty. From aggressively positioned over equities to calmly reaping the interest of liquid securities, mutual funds are an interesting lot. Hence, the for the lender, risk management of mutual funds becomes dependant on not just
While risk assessment of mutual funds is the job of the lender and has no standard process, the loan process for the customer should more or less be the same.
In this article, we are going to explore out, how you can avail a loan against a mutual fund, by pledging your units.
Who Offers Such Loans?
In contrast to the fact there are numerous distributors and agents selling funds, only a handful of companies have enough capital to provide loan against mutual fund units.
You can easily avail loan against your mutual fund units from Banks and Non-Banking Finance Company (NBFC). You can avail this loan from SBI, ICICI, Tata capital, HDFC, IDBI, Kodak Mahindra Bank, Aditya Birla Finance and others.
Loan against your MF gives the option of receiving immediate money against the mutual fund unit that you own. Best option in case of emergency. You can avail loan against your Mutual Fund and it can be a better option than some of the traditional loans.
- Loan Against Mutual Fund Unit
People invest in mutual funds owing to the latter’s prowess in offering convenience, asset diversification and long term gains. However, apart from yielding good economies of scale in terms of lower transaction costs (as compared to buying individual stocks), mutual funds offer another benefit: liquidity in times of financial distress. Taking a Loan Against Mutual Fund units (LAMF) helps you leverage your existing mutual fund investments.
- Approach for LAMF Unit: Lenders would consider after seeking a lien on the MF units.
(What Is Lien- Document that gives the Bank/NBFC the ownership right to hold or sell your mutual funds.)
2. A Lien request letter should be signed by all unit holder.
3. Bank/NBFCwrite to MF Registrar to mark Lien on a certain number of units that can be used for loan.
For the whole process, the bank may charge a processing fee and government may accordingly charge a stamping fee too.
Further, bank’s usual inspection, formalities, CIBIL report etc. ,would obviously be a strong part of the whole process.
Now let’s find out what are some common eligibility and rules that are required to avail the loan.
Eligibility & Rules
- Loan offered, depends on the Mutual fund Folio Units.
- You would get around 50-70% of the Mutual fund Value.
- Not all Mutual Funds are Eligible.
- Few banks consider loan against hybrid or equity MF Units.
- Mutual Fund must be approved by the lender for loan.
- Units under loan are not eligible for sell or you cannot switch units, but you can continue to receive Mutual Fund Dividends.
When it comes to loans against securities such as fixed deposits, mutual funds or stocks, usually an overdraft is recommended. Overdraft limits your interest expense and moreover, limits your expenses. It can also be accessed via a cheque book and debit card. Further, there is usually no charge on pre-closing the overdraft.
Thanks to various financial instruments, we can take a credit by not actually selling the whole investment portfolio. For meeting our short terms requirements, using these small savings can really come in handy. Moreover, you can close the loan whenever you want.