Digitalisation has introduced innovative products and services, such as digital loans against mutual funds, allowing investors to access funds while keeping their investments.
While this financial instrument offers flexibility and convenience, weighing its pros and cons carefully is essential. Let’s explore in this detailed blog!
One of the primary advantages is the ability to access liquidity without liquidating your mutual fund holdings. This is particularly beneficial if you believe in the long-term potential of your investments and do not wish to disrupt your portfolio.
Digital loans against mutual funds are known for their speedy approval and disbursement processes. With minimal documentation and an online application, borrowers can access funds swiftly during emergencies or planned expenses.
Banks and financial institutions often offer competitive interest rates on these loans, making them attractive compared to high-cost alternatives like credit card debt or personal loans.
When you opt for a digital loan against mutual funds, you continue to benefit from any potential capital appreciation and dividends generated by your investments. This ensures that your money continues working for you.
If the value of your pledged mutual fund units falls significantly, you may face a margin call. In such cases, you might be required to either repay a portion of the loan or pledge additional collateral to cover the shortfall.
If you fail to meet margin calls or repay the loan as agreed, the lender has the right to liquidate your mutual fund units to recover the outstanding amount. This can result in capital losses and tax implications.
Often, lending institutions offer loans up to a certain percentage of the mutual fund's Net Asset Value (NAV). The LTV ratio varies, and borrowers may not be able to access the full value of their investments.
While interest rates on these loans can be competitive, they still represent an additional cost. Borrowers need to assess whether the returns on their mutual fund investments justify this expense.
Consider the following before getting a digital loan against mutual funds:
Digital loans against mutual funds can be a valuable financial tool, however, like any financial product, they come with their share of risks and costs. Moreover, not everyone may have mutual fund units to take a loan against. Fortunately, though, you can always opt for an instant personal loan.
Fi Money provides instant loans that arrive directly in your savings account. These are pre-approved personal loans made available to select users with good credit scores. On Fi, this process is 100% paperless, and the loans are provided at competitive interest rates — where each user remains in control with complete visibility of all details. Plus, you can avoid EMI late fees by setting up automatic in-app payments. Our licensed partner bank assigns an eligible loan amount to each user (up to ₹5 lakh).
In a digital loan against mutual funds investors pledge their mutual fund units as collateral to obtain a loan from banks or financial institutions, all processed digitally.
Investors apply online, pledging their mutual fund units as collateral. After due diligence and valuation, lenders disburse the loan amount directly into the borrower's account.
Benefits include liquidity without selling assets, quick approval, competitive interest rates, and continued ownership of mutual fund returns.
Risks include margin calls due to falling mutual fund values, potential liquidation, limited loan-to-value ratio, and additional interest costs.
Eligibility criteria typically involve a minimum mutual fund portfolio value, acceptable fund types, and compliance with lender-specific terms and conditions.