Loan against Mutual Funds and Shares
A loan against mutual funds and shares allows investors to use their investment holdings in mutual funds or shares as collateral to secure a loan. This type of loan offers a way for investors to access funds without liquidating their investments, providing financial flexibility and maintaining their investment positions. Understanding the key features and aspects of loans against mutual funds and shares is essential for making informed financial decisions.
1. How Loans Against Mutual Funds and Shares Work
Collateral: Investors use their mutual fund units or shares held in a demat account as collateral to secure a loan.
Loan Amount: The loan amount is determined based on the value of the mutual fund units or shares pledged, often a percentage of their market value.
Interest Rate and Repayment: Interest is charged on the loan amount, and borrowers can repay the loan at their discretion, usually without a fixed repayment schedule.
Loan Disbursement: Once the loan is approved, the funds are made available to the borrower, often through direct deposit or a check.
2. Key Components of Loans Against Mutual Funds and Shares
Loan-to-Value (LTV) Ratio: The percentage of the mutual fund unit or share's value that the lender is willing to provide as a loan. It typically ranges from 50% to 70%.
Interest Rate: The rate at which interest is charged on the loan amount, often varying among lenders and based on market conditions.
Loan Tenure: The duration within which the borrower can repay the loan, although there is usually flexibility in repayment terms.
Repayment Options: Borrowers can choose to make interest payments periodically or let the interest accrue and settle it when repaying the principal.
3. Benefits of Loans Against Mutual Funds and Shares
Maintain Investments: Investors can retain their investment positions in mutual funds and shares while accessing liquidity for immediate needs.
Quick Access to Funds: Loans against mutual funds and shares can be processed quickly, providing rapid access to funds.
Potential Lower Interest Rates: Interest rates on such loans may be lower compared to unsecured loans due to the presence of collateral.
No Impact on Credit Score: Since the loan is secured, there is no direct impact on the borrower's credit score.