The 4 Most Important Tips for Availing a Loan against Mutual Funds

You may already know that mutual funds are a potent way to build money. But did you know that you can also use a loan on mutual funds if you need instant cash in case of financial crunches? Yes, you can! But for that, you must pledge your MFs as collateral to secure the loan.

Digital loans, including LAMF, have become increasingly popular recently, not because they are quickly available but because they come with several other benefits, such as low-interest rates, repayment flexibility, minimal documentation, and hassle-free processing.

By pledging your MF units as security to get a quick loan online, you agree to the terms and conditions of the lenders. Therefore, you may need to be financially literate to make a better borrowing decision. Here are 4 tips that will help you find the best bet.

1. Find a lender that offers the best value for your MF investments

When considering taking a digital loan against mutual funds, all it starts with thorough research. After you have short-listed a few lenders that you think may fit your borrowing needs, it is prudent to compare them on the terms & conditions, interest rates, and the amount they offer.

The minimum and maximum loan against mutual funds’ limits may differ from one financial institution to another. Similarly, they might have different interest rates, charges, and loan plans. It requires you to be more selective about the lender. How to pick the best out of them, then?

Well, it depends on your borrowing needs. A lender that gives you a higher percentage of the value of MF units is what you may consider. The higher the percentage is, the more the loan amount you may get for your MF investment. Those seeking a loan amount of up to Rs. 1 Crore may approach Abhi Loans, a trusted NBFC offering 65% of the value of equity MFs and 75% of the value of debt MFs. The minimum loan amount you can avail of here is Rs. 15000. Borrowing against mutual funds from such a lender will get you flexibility on loan amounts.

2. Assess your repayment affordability

Things go smoothly as long as you pay timely EMIs. But an instant loan against securities, such as mutual funds, could be a debt trap if you fail to repay the loan on time. So, it is crucial to figure out your borrowing needs and churn about how much you can pay monthly in the form of EMIs without compromising your daily expenses.

It is worth mentioning – if you default to pay EMIs, you will have to submit more securities or the lender will have the right to sell your pledged MFs to compensate for losses or missed payments. Defaults on EMIs might also attract certain penalties, including collection charges and legal charges. These charges may vary from lender to lender.

That, in turn, may hinder your financial goals, making the case worse. One wise move to avoid the chances of any such happening could be to know your repayment affordability beforehand.

3. Enquire if there are any prepayment charges applicable

Not all financial institutions are the same, nor are their terms and conditions. So, be careful while reading their terms & conditions before signing any agreement. Also, do not shy away from asking about the processing fees and other charges if applicable.

A digital loan against mutual funds comes with prepayment options. That means you may pre-close the loan anytime within the tenure. But, many banks/NBFCs charge prepayment fees if you choose to pre-close your loan.

Also, some institutions, including Abhi Loans, do not take prepayment charges. Such lenders facilitate you to pay at will without extra cost to your pocket. So, it is wiser to approach such a lender when taking a loan against mutual funds.

4. Check on the loan against mutual funds’ interest rates and processing fees

The loan against mutual funds interest rate is one of the most crucial factors to consider, as it determines how much the EMIs and total loan will cost. The interest rate depends on the EMI plan you take. Usually, it may go up to 16% per annum.

However, if you take an instant loan against securities from Abhi Loans, the IR starts from as low as 0.67% monthly, which converts into 8% per annum flat.

Also, do not overlook the processing fees applicable while borrowing against mutual funds. It is a one-time cost and can be up to 2% of the loan amount disbursed. For example, at Abhi Loans, it is 2% of the loan amount or Rs. 1000 (whatever is higher) + GST.

In conclusion

To sum up, an instant loan against securities or a digital loan against mutual funds is an attractive way to raise quick funds without compromising on the returns and hindering your growth prospects. But then, if you want to make the most of this loan facility, you will need to find a lender that gives you the loan against securities at competitive interest rates, has no hidden charges, maintains transparency, and facilitates no pre-closure fees. For all that, you may contact Abhi Loans, a regulated NBFC registered with RBI.