While lump-sum investments in mutual funds are still a long shot for most of us, SIP or Systematic Investment Plans have made it easier to reap market-linked returns. Fostering disciplined investment habits, SIPs make periodic investments in mutual fund schemes possible.
However, when faced with a pressing financial crisis, most think stopping SIPs or redeeming investments is prudent. But that's not the case. A loan against your SIP is a better alternative since it doesn't jeopardise your investment trajectory or push you to pay high exit loads.
In this blog, we will explore what loans against SIP are and how to apply for them.
A loan against SIPs is a credit facility that allows you to borrow funds by pledging SIP investments with a lender. In other words, you can use the mutual fund units in your portfolio as collateral for a loan and keep investing in your SIP, even when your investments have a lien.
Lenders evaluate the maximum loan amount based on your MF units' NAV (net asset value), the LTV ratio applicable to the fund type, and the selected investment tenure. Once the loan is repaid in full, the lender’s lien on the funds is revoked. However, if you default on the loan payments, the lender reserves the right to exercise its lien on the mutual fund units, redeeming them to recoup the borrowed sum.
While now you know we can get loans against SIPs, you might be wondering if it's actually prudent to do so? Here’s why loans against SIPs are beneficial:
Most of us make regular investments through SIPs to reach certain financial goals. Suspending SIP contributions or redeeming your investment during an emergency can disrupt your financial plans. With a loan against your SIP, you can leverage your investment to obtain the required funds without losing ownership rights or diverting from your financial goals.
Loans against your mutual funds SIPs are ideal for times when you need instant funds. Since the entire process is digital and requires minimum paperwork, most lenders approve and sanction the loan in minutes.
As an asset-backed borrowing facility, loans against SIPs come with lower interest rates than unsecured loans, like personal loans. This, in turn, reduces your cost of borrowing.
If your cash flow requirement is only short-term, loans against SIPs may be your best bet to raise funds. Instead of redeeming your investment, you can instantly meet your credit requirements and repay the loan.
Interest on loans against mutual funds SIPs is not calculated on the sanctioned loan amount. Rather, it is calculated on utilised sum and the duration of utilisation. This makes managing the repayments super-easy and pocket-friendly.
Since you retain ownership of the MF units, you keep benefiting from market gains even when there’s a lien on your funds.
Remember that the application process for getting a loan against your SIP may vary across lenders. That said, here’s a quick overview of what to expect:
Loans against SIPs can help you raise an instant line of credit without abandoning your financial plans. These loans are much better alternatives to traditional credit facilities like personal loans, especially when you need low-cost instant funds for short-term use. However, weighing your options and thoroughly checking the lender’s policy is always prudent to see if your SIP investments qualify for the loan.
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A loan against SIP is a credit facility that allows you to use your MF units as collateral to borrow funds and meet immediate needs. The NAV of your mutual funds determines the loan amount, which, when repaid in full, revokes the lender’s lien on the fund units.
To qualify for a loan against SIP, your mutual fund units must fall within the lender’s approved scheme list and meet the lender’s minimum security value limit.
Yes. You can continue making SIP investments even when the units are pledged as collateral for a loan.
Interest rates for loans against SIPs are lower than those applicable to personal loans. As for repayment terms, most lenders allow you to repay these short-term loans via EMI payments or pay interest during the term and the principal at the end of the loan tenure.
Risks associated with loans against SIPs include losing your investment if you default on the loan or reduced fund value due to market over-turns. Benefits include instant loan processing, lower interest rates, and retained investment ownership.
