Mint - Taking loan in case of financial emergency is not new for any individual. However, while opting for the loan instrument, it's better to look at all possible options and their rate of interest. According to investment and tax experts, some times people opt for high interest non-secured loans without considering that mutual funds or stock investments can also be pledged and avail of loan at much lower interest rate levied by lending institutions on non secured loans like personal loan or loan against credit card. In fact, loan against mutual funds investment and stock investments help an investor to avoid capital gain taxes as well. Read more
By selling mutual fund investments, one can get a loan against them. Just as pledging other assets such as gold and real estate for a loan, one can get a loan against their mutual fund holdings from banks and non banking financial companies.
The amount of loan against mutual fund holdings largely depends on the type of mutual fund scheme one has invested in and the financial institution from which one will borrow. Many banks lend money only against the set of mutual fund schemes selected by them. For instance, SBI only gives loans against mutual schemes of SBI Mutual Fund.
Like any type of loan, there are certain limits in loans against mutual funds as well. Many banks have a maximum and minimum limit on the amount of loan it gives. In case of NBFCs, both the minimum and maximum limits are usually higher.
A key benefit of a loan against mutual funds is that it offers a lower interest rate than credit card loans or personal loans. This is because loans against mutual funds are secure, i.e. they are backed by collateral. On the other hand, in case of unsecured loans like credit card loans or personal loans, the loan is not backed by any financial assets owned. So the bank is likely to charge a higher rate of interest to commensurate the higher risk it is taking.
When someone pledge mutual fund units to take a loan against them, those units stay invested in the market. This is because when someone pledge their mutual fund units at a bank. They give the bank the right to sell the mutual fund units only in case of any default. But as long as there is no default in payment, investments remain linked to the market and continues to give easy returns.
On how loan against mutual funds or stocks is beneficial for a borrower, CA Manish P Hingar, Founder at Fintoo said, "Taking a loan against mutual funds or stocks can be a good option if you need to borrow money and have investments in mutual funds or stocks that you can use as collateral. This can be a good way to access cash without having to sell your investments, which can help you avoid capital gains taxes and keep your investments going."
However, Fintoo expert said that one can avail a loan up to a certain limit of one's holdings. The limit is higher for debt investments and lower for equity investments. This is because equity shares or equity mutual funds are volatile in nature.
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