Traditional banks and NBFCs take a long time and are a time-consuming process that often requires a lot of paperwork. Thus, there is a rising trend of individuals choosing digital loans. Typically there are two main categories of loans; secured and unsecured loans. One such kind of secured instant personal loan is a digital loan against a mutual fund wherein the borrower pledges their mutual funds.
This article explores digital loans against mutual funds and their respective advantages and disadvantages.
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Digital loan against mutual funds is a type of secured loan. The loan is given to you by keeping your mutual funds as collateral. Once you get a loan against mutual funds, you cannot sell mutual fund holdings during your loan tenure till you complete the repayment. Since the mutual funds are collateral against the given loan, lenders offer lower interest rates and flexible payment plans as compared to traditional banks & NBFCs.
Opting for a loan with mutual funds as collateral is a good option to consider. Digital loan against mutual funds advantages are as mentioned below:
Quick Access to Funds: Digital loans against mutual funds have easy approval and quick loan disbursal. This makes it a good option in case of emergencies like medical bills or any additional unforeseen expenses.
Minimal Documentation: Platforms offering this service have an online process with minimal documentation. This makes it a hassle-free option as compared to traditional banks, which require a lot of paperwork and longer time for loan disbursal.
Competitive Interest Rates: As the loan is taken against one’s mutual funds, the interest rates are lower compared to personal loans or credit cards. Taking an unsecured personal loan from banks, or NBFCs or getting a credit card leads to lenders offering high interest rates to cover the possible risk. With digital loans against mutual funds, lenders offer better interest rates since the loan is secured by collateral.
No Impact on Investment Portfolio: When you opt to take a loan against mutual funds, you retain ownership of your investment portfolio. You will receive any capital appreciation and dividends generated with your investments. Your money continues to work for you while you take a loan against a mutual fund.
One needs to also consider the risk attached to any type of loan. Digital loan against mutual funds disadvantages are as mentioned below:
Risk of Market Fluctuation: Within your loan tenure, the value of your portfolio may go low due to market fluctuation. This may lead to the lender issuing a margin call. In this case, you need to pay part of the loan or pledge additional assets. If one fails to fulfil the margin call, it could lead to the liquidation of mutual funds and result in a financial loss.
Limited Loan Amount Based on Mutual Fund Value: A lender typically offers a lower loan amount compared to the value of the pledged mutual funds. Thus you have limited access to the funds as compared to the market value of your mutual funds. You don’t have full access to the entire value of your investments.
Potential Tax Implications: One may also have to face tax implications, depending on their jurisdiction. Tax implications depend on the amount invested and loan tenure. It is advisable to make sure the overall returns outweigh the tax levied, otherwise it may lead to loss.
Also Read: Beginner’s Guide to Investment in India: Tips and Options
Before you opt for a personal loan online, consider these factors to determine if the loan suits you financial goal:
Evaluate Options: Do thorough market research on lenders that offer digital personal loans. It is advisable to carefully weigh the options and not go with the first lender one comes across.
Repayment Plan: While one considers the loan amount, it is also important to look at the repayment plan that fits your financial situation. You may access online Personal loan EMI calculators, to determine your monthly loan payments. If EMI seems too high, adjust the loan tenure or apply for a small amount.
Read The Fine Print: Carefully read all the terms & conditions and make sure you understand all the financial jargon in the loan documents. Check the personal loan documents for interest rate, acceptable payment mode, processing fees and any other additional charges, to have a clear idea about all the payment details.
Credit Score: Improve chances of quick loan approval by making sure you have a good credit score. Most lenders prefer a credit score of 750 and above. While one may still get a loan at a lower credit score, it is important to maintain a high credit score if one wants to apply for a high loan amount.
When you consider applying for a Digital Loan Against Mutual Fund, these are the tentative steps one needs to follow;
Check Eligibility: Ensure you meet the lender’s criteria, like the type and value of mutual funds eligible for a loan. Lenders might also require you to be salaried or self-employed.
Choose a Lender: Compare different lenders based on interest rates, repayment terms, and processing fees. Ensure you are aware of the terms and conditions of each lender.
Complete the Application: Fill out the online application form on the lender’s website or app, providing the required details about your mutual fund holdings.
Submit Documents: Upload necessary documents such as identification, proof of mutual fund ownership, and other KYC details.
Approval and Verification: The lender will review your application and documents. They may also verify your mutual fund holdings with the asset management company (AMC).
Loan Offer: If the loan application is approved, you’ll receive a loan offer detailing the interest rate, tenure, and repayment schedule. Review and accept the terms & conditions mentioned.
Pledge Mutual Funds: Pledge your mutual fund units to the lender as collateral. The lender will place a lien on the units, restricting their sale until the loan is repaid.
Disbursement: Once the mutual funds are pledged, the lender will disburse the loan amount to your account, typically within a few working days.
Repayment: Repay the loan as per the agreed terms. Once fully repaid, the lien on your mutual funds will be lifted, and you can access your investments again.
When you consider opting for digital loans against mutual funds, research and evaluate lenders, compare options, and choose a repayment plan that fits your budget. Use EMI calculators to calculate the EMI amount and select the plan that best suits your financial situation. Carefully read all terms and conditions, including interest rates, payment mode and additional fees. Ensure a high credit score to increase chances of loan approval and a favourable loan repayment structure.
Yes, you can take a loan against a mutual fund by pledging your investments as collateral.
You can get loan upto 50% of NAV (Net Asset Value) of your investments.
Loan against mutual funds is a good option for investors as it allows them to get loan without impacting their investments. This type of loan does not impact the credit score either.
The interest rate on a mutual fund loan is typically between 8% – 16% depending on factors like collateral risk, credit score and loan tenure.
Eligibility criteria for personal loan vary from lender. Common criteria include borrower must be an Indian citizen, 18 & above in age and having a portfolio of investments to pledge
Potential risks when using mutual funds as collateral for digital loans include market fluctuation and tax implications.
The loan amount is determined based on NAV (Net Asset Value) of your chosen funds.
Many lenders offer the option to repay the digital loan against a mutual fund early and without any foreclosure charges or lock-in period.
There are no tax implications for digital loans against mutual funds.
Traditional loans are based on one’s credit score and income. Digital loan against mutual funds, however, uses one’s mutual fund investments as collateral.