Can you get a Loan Against Mutual Funds?

Posted by Shrikant Sharma on February 20th, 2020

Many are not even aware of this condition that they could borrow loans from the banks or the non-banking institutions against the securities they hold in the mutual fund market. Some are so busy surveying the market rates that they not even look for the various options that prevail in the market. Loan against securities gives you a wide scope of financial aid at a time of need. The mutual fund market is always associated with risks and turns, however, loans that are offered against these funds are completely secured.

Here are some key pointers to keep in mind while buying loan against securities:

• You can only get a loan if your mutual funds get an approval by the financial institution which you have approached to borrow.
• It doesn’t matter if you trade in debt shares or equity shares; you are eligible to avail the loan, provided the bank or any other financial institution approves it.
• Even though the underlying rules of the RBI states only non-banking financial institutions can lend a loan against mutual funds, however, many banks do approve it as well.
• Once you deposit your funds to the institution you cannot get the documents back until the entire sum is paid off. However, you can still enjoy the dividends that are received by
  the functioning of the funds.
• It is an excellent way for money-making over short-terms when your funds are lying idle. Furthermore, interests are also lower.
• You can choose the tenure of the repayment scheme.
• Lastly, loans against funds are better than entirely selling off your funds in need of money because loans cover your financial needs at that point of time and also preserves your
  funds and future goals from getting destroyed.

Your shares or securities can be pledged upon as collaterals against which the financial institution will sanction your loan amount. Since it is a secured loan, the rate of interest charged on the payments of the loan is much lesser when compared to the interest rates of unsecured loan. The amount of the loan against mutual funds largely depends on the value of the shares you hold. This is because even if you fail or make default in your payment, the financial institution has the full right to seize your shares and take them under control.