A financial emergency can crop up at any time. It could arrive in the form of an unexpected illness in your family, a sudden yet major home repair or any other unforeseen contingency. At such crucial junctures, you may be tempted to redeem your investments to pay the bills due. However, there’s an easier alternative to consider — namely loans against debt mutual funds.
These loans are secured borrowings that you can obtain by pledging your debt fund investments with the lender. This effectively means that instead of selling the debt fund units in your portfolio, you offer them as collateral and borrow funds instead.
In this blog, we explore what loans against debt mutual funds are, how they work and their benefits.
If you choose to avail of a loan against debt mutual funds in India, you need to first have eligible debt fund investments in your portfolio. These debt funds can be offered as collateral to the lender, who will obtain a lien on the mutual fund units pledged as security. The funds will then be disbursed to you as per the lender’s policy.
Typically, the amount of money you can borrow via loans against debt mutual funds is capped as a percentage of the market value of the funds pledged. This is known as the loan
You will then need to repay the loan as per the bank’s repayment schedule. As long as you repay the EMIs promptly, the financial benefits from the debt funds will continue to accrue in your portfolio. However, if you fail to repay the loan, the lender will redeem the investments you’ve pledged and use the sale proceeds to compensate for the unpaid balances. In other words, you will lose your investments.
The exact process of obtaining a loan against debt mutual funds in India may vary based on the lender. Broadly, however, the process of borrowing funds via this route is as follows:
After you have repaid the entire loan, the lien on the debt fund units is removed and your investments are yours to hold or redeem, as per your financial plan.
A loan against debt mutual funds can be advantageous to the borrower in several ways. If you are in a dilemma about obtaining this type of secured loan, check out the benefits it offers. That way, you can make an informed decision.
By opting for a loan against debt mutual funds, you can obtain liquid cash without being forced to redeem your investments. Such secured loans are also processed fairly quickly nowadays, making it easy to access liquid funds without any major delay.
Loans against debt mutual funds typically have lower rates of interest than unsecured borrowings. This is because the debt funds that you pledge as collateral lower the risk for the lender.
As long as you repay the loan as per the schedule, your investments remain intact over the entire repayment tenure. This allows you to pursue your financial goals without redeeming your investments, while also meeting your emergency cash requirements.
The funds that you borrow via this credit facility can be used for various purposes like debt consolidation, paying medical bills, funding your business venture or even paying for your higher education.
Since debt funds are relatively safe investments, the loan-to-value ratio for these assets is fairly high. This means you can borrow around 70% or more of the investment value as a loan against your debt mutual funds.
This concludes the key details of what loans against debt mutual funds are, how they work and the benefits they offer. If you have invested in debt funds and ever find yourself in need of liquid funds, you can consider availing of this credit facility. However, keep in mind that only some debt funds may be eligible to be offered as collateral. Check with your preferred lender for more clarity.
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A loan against mutual funds is a secured credit facility. To avail of this type of loan, you need to pledge debt mutual fund units to the lender in exchange for funds.
The eligibility criteria for loans against mutual funds in India include owning the qualifying mutual funds, meeting the minimum pledge value and having a good credit score/history.
A loan against mutual funds has many benefits over other facilities, like quicker processing and lower interest rates. It also means you don’t have to liquidate your investments.
Factors like the fund’s performance, market volatility, your credit score and the lender’s policies affect the interest rates and loan amounts for a loan against mutual funds.
Some risks to be aware of include a potential decrease in the fund value and the possibility of losing the asset pledged if you do not repay the loan.
