How can loan against mutual funds be a good option compared to redemption?
Are you looking for a way to access funds without touching your long-term investments? Loan against Mutual Funds may be the answer you've been searching for. It's a great option compared to redeeming your mutual fund investments, as you can still retain ownership of your units and enjoy all the associated benefits.
In this article, we will explore everything you need to know about Loan on Mutual Funds and why it is a good option compared to other types of loans.
What is Loan against Mutual Funds?
Borrowing against mutual funds is a type of loan where investors can pledge their mutual fund holdings as collateral to avail a loan. This type of loan is offered by banks and financial institutions, and it allows investors to access funds without having to redeem their mutual fund units.
When an investor takes a loan against mutual funds, the lending institution places a lien on the mutual fund units, which means that the investor cannot sell or transfer the units until the loan is repaid. The amount of loan that can be availed depends on the Net Asset Value (NAV) of the mutual fund units and the type of scheme held.
The repayment of loan against mutual funds is usually flexible and can be done by paying only the interest every month. The principal amount can be paid back at any time during the loan tenure. This type of loan does not have any lock-in periods or prepayment charges, which means that investors can make payments at their convenience without incurring any extra charges.
What is the difference between personal loans and Loan against Mutual Funds?
Compared to personal loans or credit cards, which are unsecured loans, loan on Mutual Funds is a secured loan with a lower interest rate. Unlike personal loans, borrowing against Mutual Funds offers more flexibility in terms of repayment. While personal loans come with a fixed EMI (Equated Monthly Instalment) that includes both principal and interest, Loan against Mutual Funds requires customers to pay only the interest each month. Additionally, borrowers have the option to repay the principal amount at any point during the loan tenure.
Another advantage of Loan against Mutual Funds is that there are no lock-in periods or prepayment/foreclosure charges, unlike personal loans. This means borrowers can make payments at their convenience without incurring extra charges.
Why is Loan against Mutual Funds a good option compared to other loans?
One of the biggest advantages of Loan against Mutual Funds is that it provides access to funds without liquidating your investments. This is especially useful during volatile market conditions, where redemption may result in lower NAVs, affecting your long-term financial plan and goals. Additionally, redemption may attract short-term or long-term capital gain tax.
Digital Loan against Mutual Funds
With the advent of digital technology, Loan against Mutual Funds has become even more accessible and convenient. Digital Loan against Mutual Funds allows borrowers to apply for and receive loans online, without having to physically visit a bank or NBFC. This makes the entire process faster and more convenient.
To avail of Digital Loan against Mutual Funds, you need to have a demat account with the RTA and have your mutual fund holdings in demat form. You can then apply for the loan online, and the entire process is completed digitally. This allows you to access funds quickly and easily, without having to go through the hassle of visiting a bank or NBFC.
Conclusion
In recent times, digital loan against mutual funds has become popular, allowing investors to apply for and avail of loans online. Digital loan against mutual funds provides a quick and convenient way for investors to access funds without having to visit a bank or financial institution in person. The process of availing a digital loan against mutual funds is usually simple and involves minimal documentation.
Overall, loan against mutual funds can be a good option for investors who need funds urgently but want to maintain their long-term financial plans. However, investors should carefully consider the terms and conditions of the loan and their ability to repay the loan before availing it.
