The financial landscape today offers a broad spectrum of loan types designed to cater to different financial situations and objectives. One such loan type that has gained significant popularity recently is a loan against mutual funds (LAMF). This facility provides an opportunity for mutual fund unit holders to ‘borrow’ money against their fund investments. Let’s delve deeper into this concept and figure out when it might be considered as a viable financial option.
A loan against mutual funds is an offering from banks or non-banking financial companies (NBFCs) where the mutual fund units held by borrowers are treated as collateral. This type of loan can be availed against both equity and debt funds and are offered as overdraft facilities. This means borrowers can withdraw funds as and when they need, and interest will be charged only on the amount utilized and the tenure of utilization.
Before digging into the scenarios where you might consider this loan type, it’s worth noting that you can check the market value of your securities and how much you are eligible to borrow using a loan against securities calculator. This tool uses the asset value and Loan-To-Value (LTV) ratio set by the lender to calculate the maximum loan amount you can avail against your mutual funds.
Now, let’s look at the conditions when taking out a loan against mutual funds can be a sensible financial decision.
Urgent Cash Requirement: Life can throw curveballs at any time that can result in immediate financial needs. In such situations, a loan against mutual funds can be a better option than a personal loan. The former is usually disbursed faster with fewer procedures, so you can meet immediate cash requirements. Due to its overdraft nature, you can withdraw only the necessary amount and pay interest for the utilized portion alone.
Avoiding Redemption: On many occasions, there may be a need for funds but redeeming mutual funds may not be the best solution. It could be due to reasons linked to market situations, tax outcomes, or the fund’s performance. In such cases, taking a loan against mutual funds allows you to meet your financial commitments without tampering with your investment plans.
Home Improvement or Purchase: If you are planning to renovate your existing property or buy a new one, and you lack funds for an up-front payment, taking a loan against mutual funds can be beneficial. It’s often cheaper to borrow against your mutual funds than taking out a mortgage loan or personal loan.
Business Expansion or Unforeseen Expenses: Many startups and small businesses often need to fund their expansion activities or meet unforeseen expenses. As banks and NBFCs often treat loan against mutual funds as secure loans, they may attract lower interest rates than traditional business loans. Thus, business owners can retain ownership of their mutual funds while obtaining the finances they need.
However, despite the benefits, exercising caution is crucial when acquiring any type of loan, including those against mutual funds. Here are a few tips to keep in mind:
Evaluate the Cos: One should compare the interest rates on different types of loans, such as home loans, personal loans, or loans against properties, and choose the most cost-effective option. Loan against securities calculator can be a valuable tool in this process.
Consider the Risks: It is essential to understand that a loan against mutual funds inevitably involves risk. If you fail to repay the loan, the lenders have the right to sell your pledged mutual fund units to recover their amount. You should only opt for this loan if you have a strong repayment plan in place.
Conclusion
In conclusion, a loan against mutual funds could be a powerful tool to meet short-term financial needs without causing a significant dent to your long-term investment plans. Before taking the plunge, be sure to use resources like the loan against securities calculator and credible websites such as smallcase.com for further research, and align your choice with your overall financial strategy. As with all financial decisions, it is important to create a balance between your current financial needs and long-term financial goals.
