In the ever-evolving landscape of personal finance, leveraging existing investments for liquidity is becoming a popular strategy. One such method is taking a loan against mutual funds. This option allows investors to use their mutual fund units as collateral to secure a loan, providing an efficient way to access funds without disrupting their investment portfolio. Here are the top five reasons why opting for a loan against mutual funds can be a smart financial move.
1. Quick and Easy Access to Funds
One of the most compelling reasons to opt for a loan against mutual funds is the speed and ease with which you can access funds. Traditional loans often involve extensive paperwork, lengthy approval processes, and stringent eligibility criteria. In contrast, a loan against mutual funds can be processed swiftly since the lender holds the mutual fund units as collateral, reducing the risk involved.
The process is straightforward: you approach a financial institution or a Non-Banking Financial Company (NBFC) that offers loans against mutual funds, fill out a loan application, and pledge your mutual fund units. Once the units are pledged, the loan amount, usually a percentage of the value of the pledged units, is disbursed to your account. This quick access to liquidity can be particularly beneficial in times of financial emergencies or when you need immediate funds for opportunities that require prompt action.
2. Retention of Investment Portfolio
Taking a loan against mutual funds allows you to retain your investment portfolio. This is a significant advantage because it means your investments can continue to grow and generate returns while you utilize the loan amount for your financial needs. Unlike selling your mutual fund units to raise money, which would mean forgoing future gains and incurring potential capital gains tax, pledging your units as collateral keeps your investment intact.
This retention of the portfolio is especially beneficial if the mutual funds are performing well. The growth potential of the investments remains unaffected, allowing you to benefit from any market upswings. Additionally, as the value of your mutual fund units increases, you can potentially pledge additional units to secure a higher loan amount or negotiate better terms with the lender.
3. Lower Interest Rates Compared to Unsecured Loans
Another significant advantage of taking a loan against mutual funds is the lower interest rates compared to unsecured loans like personal loans or credit card advances. Since the loan is secured by the mutual fund units, lenders face less risk and, therefore, can offer more competitive interest rates. This can result in substantial savings over the loan tenure.
The interest rate for loans against mutual funds typically ranges from 9% to 12%, which is considerably lower than the 15% to 20% interest rates commonly associated with personal loans and credit card debt. Lower interest rates translate to lower monthly payments, making it easier to manage your finances and repay the loan without straining your budget.
4. Flexible Repayment Options
Loans against mutual funds often come with flexible repayment options, providing borrowers with greater control over their financial planning. Lenders generally offer different repayment modes, such as equated monthly installments (EMIs) or bullet repayment options, where the principal is repaid at the end of the loan tenure. This flexibility allows you to choose a repayment plan that best suits your financial situation and cash flow.
Moreover, some lenders provide the option to prepay the loan without any prepayment penalties. This means you can repay the loan ahead of schedule if you have surplus funds, thereby reducing the overall interest cost. Such flexibility in repayment terms is particularly advantageous for borrowers who might experience fluctuations in their income or those who anticipate receiving lump-sum amounts in the future.
5. Preservation of Credit Score
Maintaining a good credit score is crucial for accessing future credit facilities at favorable terms. Taking a loan against mutual funds can help preserve your credit score, as it is a secured loan and generally has a lower impact on your credit rating compared to unsecured loans. Timely repayment of this loan will reflect positively on your credit history, enhancing your creditworthiness.
Furthermore, since the loan is backed by your mutual fund investments, the likelihood of default is lower. In the event of a default, the lender can liquidate the pledged units to recover the loan amount, thereby reducing the risk of a negative impact on your credit score. This safety net ensures that your credit score remains relatively unaffected, allowing you to maintain access to other credit facilities when needed.
Conclusion
Opting for a loan against mutual funds presents several advantages, making it a viable option for individuals seeking quick access to funds without disrupting their investment portfolio. The process is quick and hassle-free, allowing you to retain your investments while benefiting from their growth potential. The lower interest rates, flexible repayment options, and preservation of your credit score further enhance the appeal of this financial strategy.
When considering a loan against mutual funds, it is essential to evaluate the terms and conditions offered by different lenders, ensuring you select the best option tailored to your financial needs and goals. With careful planning and prudent financial management, a loan against mutual funds can be an effective tool to meet your short-term financial requirements while safeguarding your long-term investment objectives.
