The process of loan approval and sanctioning is quite similar to the overdraftfacility which the bank offers. There is an option of equity and hybrid mutual funds, which are appropriate for a non-banking institution. For any such financial institution to sanction a loan amount, security is a must. Also, whenever a financial crunch occurs, it’s always worrisome. A lot of times, investors require urgent instant money and that is when mutual funds can be extremely beneficial. Even if all the mutual funds cannot be liquidated completely but they can be used as security to get bank loans.
Apart from all the options, using mutual funds can be an easy option. Loans against mutual funds can be quick and just as instant. The only benefit here is that units need not be prematurely converted. This is often called an SIP (Systematic Investment Plan) which does not happen flow of money.
The process is important, considering pledging your asset is quite avoided. The chosen loan will be based on the number of mutual fund units bought and length of time.
Interest Rates for Loans against Mutual Funds
You can expect a repayment of the amount at an interest rate of 10-11% on all mutual funds. This is in tandem with the rules and regulations of the lender and loan tenure. Due to the nature of this loan, interest rate is much lower. At the same time, if your credit score is desirable, then the bank may agree to a low interest rate still.
Lien for Mutual Funds
Lien for mutual funds is an important topic to cover when discussing loans on mutual funds. Lien is a document that provides the right to bank to sell their funds or even keep it for long. So whenever you mark lien in favor of bank, the mutual fund units get transferred in the same name.
You can approach the bank and ask for a lien in the same name on the mutual funds. You need to approach your fund house and ask for a lien on your units in the name of the bank for a lien transfer to the bank. All mutual funds holders who possess units must write a letter to the bank.
How do you apply for Mutual Fund Loans?
Unit holders can have physical copies of loan documents; in case they opt for it.
When the mutual fund units are marked, its significant to keep note of its value. What we need to understand is that loan lien is marked on the units and not its relevant amount. One is not allowed to redeem the amount before full repayment.
Availability of Loan against Mutual Funds
Let’s not forget how important it is to evaluate the amount of money accruing on the mutual funds. For e.g. equity based funds can act supreme for you to get nearly 50% of the Net Asset Value of your funds. A few financial institutions have a minimum and maximum cap on the loan amount applied for. This clearly explains why loans against mutual funds can act hugely beneficial for individual seekers.