If Taking A Loan Against Mutual Funds, Keep These Things In Mind
Under personal finance management, investment planning is the best-expected activity. Nowadays, many people are taking advantage of investing in mutual funds. However, many people are not understanding the provision in which a person can take loans against mutual funds. Such loans are very short term and effect during any emergency or event.
An individual can obtain loans from NBFCs or banks by choosing for loans against mutual funds instead of personal loans at high-interest rates. Here are useful and important details to know about loans against mutual funds.
Types of Mutual Funds
- Equity Funds
- Debt Funds
- Gilt Funds
- Diversified Funds (Hybrid Funds or Balanced)
- Sector Specific Funds
- Index Funds
- Money Market Funds
Why do we take loans against Mutual Funds (LAMF)?
Generally, a loan against mutual funds offers the opportunity to get instant liquidity against mutual fund units. Furthermore, it is actually an overdraft facility for short-term monetary (STM) requirements, which has a shorter duration than any other loan. For the benefit of LAMF, you should request all mutual fund registrars to mark a lien against all mutual fund entities.
A lien Document against Mutual Funds
Basically, the Lien is an important document that provides to the bank the right of ownership to sell or hold the mutual funds. This means that when a person gives a lien document in favor of any bank, a person is acquiring the bank the right of ownership of the mutual fund entity owned.
Bank Guidelines
Banks always accept mutual funds that are listed on the stock exchange or provide a repurchase facility for units of mutual funds at the time of lending.
According to many banks, loan money is based on the repurchase price/market value or net asset value (NAV), whichever is less than the face value.
As per Reserve Bank of India guidelines, advances against units of MFs (excluding units of debt-oriented funds in particular) are attracting margin and quantum requirements applicable for against debentures and shares.
Loan Tenure
Nowadays, NBFCs or banks provide the facility in the initial tenure of one year. Once the period is over the account is reviewed and based on the outcome of the review, the tenure is renewed for another year.