An investment in mutual funds can help you in acquiring wealth over time. They are investment tools in which the AMC collects money from different investors. Once enough money is collected in the fund, the AMC uses it to invest in different financial securities. The revenue that’s generated through the scheme is later divided amongst the investors proportionately. Thanks to the different advantages associated with mutual fund schemes, they have slowly become one of the most preferred investment options amongst middle-class investors in India.
Different types of mutual funds can help you with acquiring wealth in the long term, which is a common goal for mutual fund investors.But, a common misconception that people have about mutual fund schemes is that they are useful just for long-term wealth acquisition. However, that’s not the case. Other than acquiring wealth in the long term, there is a wide range of purposes you can use a mutual fund scheme for. One of these uses is serving as the collateral for loans. While it is true that mutual funds can be a great way to earn money with the help of your idle savings,when thereis an urgent need for money, mutual fund schemes also have your back.
What are loansagainst mutual funds?
A loan against mutual funds is a type of loan offered against securities. This type of loanprovides you withthe flexibility to access money from your investments.This can be done in cases of emergencies. Moreover, this can be done without redeeming or selling your securities, which in this case, could be your mutual fund investments.You can use your mutual fund investments to get a loan by pledging them to a financial institution such as an NBFC, i.e., a non-banking financial company or a bank. The value of the loan you can avail of is dependent on the value of units that are held in your folio.
How does this type of loan work?
As mutual fund units serve as collateral, unless you were to fully repay the loan, redeeming the units pledged is not permitted. So, if you are paying for an ongoing SIP (systematic investment plan), you need to ensure that the payments for your SIP are not interrupted when you are applying for a loan against mutual fund schemes.Several NBFCs (non-banking financial companies) and banks nowadaysare known for offeringloansagainst mutual funds through both offline and online modes. Moreover, there are some digitally well-equipped banks, that are known for offeringloansagainst mutual funds online without any paperwork. Usually, these loans are sort of pre-approved for a set of already qualified customers.
Are there any benefits that are associated with these loans?
Listed below are the benefits that are associated with using mutual fund schemes as collateral for loans:
- These loans can be disbursed quickly:
This type of loan can be availed quickly by opting for simple online processes. The online process can result in faster disbursal of the requested amount. Furthermore, the procedure also requiresthe submission of fewer documents making them faster than the offline procedure.
- You don’t need to pay extra:
You are required to pay interest only for the amount used. You are not required to pay for the entire loan amount that was sanctioned.
Since mutual funds are known for acting as collateral, these loans are considered both secure and easy to avail, unlike other types of loan options. It is possible for you to quickly access these loans without redeeming or selling your already existing mutual fund investments. The final sum is dependent on the value of units in your portfolio.