Even if you have decided to deal with your financial requirements with a loan on mutual funds, there are various other things to consider as well.
Most of them are related to basic features and elements of a mutual fund loan.
Whether you are a first-time borrower or a returning one, it is always good to learn about new things. As a result, we have created this post for potential future borrowers of a loan on mutual funds.
Here you will be able to read about seven things to remember before applying for such services.
Moreover, we will discuss in detail all the related features of a loan on mutual funds.
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Although a loan on mutual fund is available for everyone, there is a certain age bracket created. Anyone who is below or above this particular age bracket cannot apply for this funding option. As of now, the age group which is followed is between 18 to 65 years. Keeping this point in mind will allow you to save on time while applying for a loan on mutual fund.
Unlike numerous other financing services, a loan on mutual fund has been designed for short term use. This means you will not be able to enjoy an elaborate tenor like in the case of other options.
The average tenor of this overdraft or loan facility is one year.
However, a borrower can renew their loan on mutual fund easily after the tenor is over.
Potential loan amount
Submitting an asset as collateral is not enough for achieving an extensive amount for a loan on mutual fund.
There is a percentage limitation, which has been decided by most financing companies.
This limit is set around 75% of your mutual fund value. In other words, you will be able to obtain funds equal to 75% of your current mutual fund value.
The next point which a lot of borrowers skip out on is the eligibility of mutual funds. Not every type of mutual fund is ideal for acquiring a loan. The same has been stated by the Reserve Bank of India and other financing institutions within the country. Hence, before you apply for a loan on mutual funds, you should check the eligibility first. It needs to be done to make sure that your asset category is mentioned.
Funds that can’t be pledged
In case your mutual fund does not make the list of eligible assets, then there is another way around. Whichever bank of financing institute has issued you mutual funds, you can borrow a loan from them itself. If explained in simple words, you can apply for a loan on mutual fund through the company, which was used for investing.
Requesting a lien
A loan on mutual fund can never be acquired without one particular document. This document is called a lien. It is used by a borrower to hand over his mutual fund rights to the financing company. Hence, before beginning the application process, you need this document handy.
Average interest rates
The last thing that a borrower must know about is the interest percentage of a loan on mutual funds. It can be anywhere from 9% to 11% in general. However, many factors can affect the interest rate charges.
The most common is the risk level attached to the mutual funds.
Additionally, as the interest rates for the loan against mutual funds can be lower as compared to an unsecured loan it is thus easier to pay off.
Relevant / Basic paperwork needed
Having the right paperwork to support your loan application increases the chances of your loan application getting accepted by the lender. This allows lenders to extend their trust on the loan seeker and help them acquire a substantial loan amount as per their profile to meet their financial needs.
Type of funds
It may be noted that the loan against mutual funds also depends on the type of fund you have invested in.
For instance, equity-based funds can help you avail up to 50% of the Net Asset value of your funds.
Where, some financial institutions also have a maximum and minimum cap on the amount of loan that you can apply for. Moreover, financial planners recommend taking loan against equity oriented mutual funds. This is because they can help acquire an amount up to 50% NAV of the fund.
Increase financial potential of your investment
The loan against mutual funds is a good way to receive instant liquidity against the mutual funds unit owed by you. This helps to increase the potential return value of your investment and quickly raise capital for short-term as well as long-term financial needs.
Besides, opting for a loan against this fixed asset ensures that you do not have to sell your units and hence your financial plan and ownership of fund remains unchanged.