HomeFINANCEBanking & LoansWhat is a Loan Against Mutual Funds?

What is a Loan Against Mutual Funds?

Almost everyone has thought of getting a personal loan for different reasons, be it to get married, buy new appliances to get the latest iPhone launched or buy an asset if you’re mindful.

Personal loans are our go-to place for all our needs, through which we mindlessly pay 30 to 40% interest rates on the capital. Loan against Mutual Funds is an alternative that can save you the interest paid on loans for personal needs.

In this blog, let’s explore the possibility of sensible loans and how to use loans against Mutual Funds to your advantage, know the process of cheap interest loans availed by the rich and be aware of some common traps!

What is Wrong with Personal Loans and Credit Cards?

Being consumers,  we’re used to opting for traditional forms of credit when needed and tend to avoid analysing the rate of interest and the complex terms and conditions behind these. Some of the familiar sources which lend money easily are described as follows:

Credit Cards

  • Credit cards have been an easy way to opt for credit to buy things we cannot afford in one go. They’re only helpful if you use them for specific offers and airport lounge access. Paying credit card bills on time after statement generation is essential if you own one. 
  • Credit cards promote buying by offering attractive offers like No-cost EMIs and discounts, which force you to buy products far above requirements. Plastic money does not let us realise our spending.
  • Credit card issuing companies promote overspending and, thus, offer the facility of only paying the “minimum amount due”, which is a step closer to a debt trap! The interest on the pending amount is up to 35-40%, and it takes no time to make things go wrong.

Understanding your CIBIL score is key when you’re thinking about getting a loan. A CIBIL score is like a report card of your financial health, showing banks how good you are at managing your money and paying back loans. If your score is low, banks might think you won’t pay back the loan and could reject your application. This part of our guide explains what a CIBIL score is, why it’s so important, and how you can make sure yours is good enough to help you get your loan approved. It’s all about making sure you look like a safe bet to lenders.

Buy Now Pay Later Schemes

  • To encourage you to buy expensive products, you must have frequently observed the Buy Now Pay Later option on almost all e-commerce websites.
  • Amazon and Flipkart promote BNPL schemes on a large scale through their advertisements and, thus, manipulate people into using them.
  • The same concept revolves around advanced salary apps, which let you use your salary amount before it is credited.
  • This involves you in a credit cycle, thus building your habit of surviving on credit rather than your actual salary.

Personal and Consumer Loans

  • As the name explains itself, personal loans fulfil personal requirements. This kind of loan usually serves as an expenditure on events such as foreign vacations and weddings.
  • It involves much paperwork, and the applicant has to visit the bank for an in-person interview, thus making the whole process hectic and time-consuming.
  • The interest rates offered for personal loans are between 13% and 26%, thus adding to a massive interest over a significant period.
  • Thus, fulfilling desires without financial planning is stupid and destroys your long-term goals. Not only does it take you one step back from financial independence, but it also creates a financial burden when it comes to repayment.

Benefits of Loan Against Mutual Funds: Why not sell Mutual Funds?

As we count on the benefits of a loan against mutual funds, you may argue that selling them is a great idea instead of opting for a loan against them. This statement may sound like a solution to your credit requirement, but it is not.

Selling mutual fund units should be avoided as the compounding process is primarily affected. Benefits of using your mutual funds as collateral is beneficial in the following ways: 

  1. Exit Load of Mutual Funds: All Mutual Funds charge a fixed percentage as an exit load when the mutual fund units are sold. Thus adding to the downsides of selling the mutual fund units.
  2. Effect on Long-Term Goals: Apart from exit load, selling mutual funds implies disturbing the compounding process, thus affecting returns significantly.

No Bank Visits and Complex Paperwork

Applying for a Loan Against Mutual Funds involves no physical bank visits. Unlike personal loans, where banks enquire about the use of loan amounts, tons of paperwork has to be completed.

Through different service providers of Loans against Mutual Funds, you can easily avail of their facilities from home.

You can get a pre-approved credit limit, meaning a specific amount is calculated based on your portfolio and is available to you with a single click. Thus, it takes no time to cash out from your available credit limit.

Getting a loan involves more than just filling out an application. There are many secrets and tips that banks don’t usually share, which can affect your loan process and finances. Our Ultimate Banking Masterclass reveals 50 things that banks keep under wraps. From hidden fees to the best ways to negotiate better terms, this guide is packed with insider info that can save you money and make your loan experience smoother. Whether you’re a first-time borrower or looking to refinance, knowing these secrets can give you an edge.

What is meant by LIEN? Choosing your Credit Limit

Sounding complicated, LIEN is a fancy term for keeping your assets as collateral with the company issuing loans against your asset; in our case, this asset is your mutual fund holdings.

When the company issues a loan against your mutual funds of a specific value, it marks the corresponding holdings as LIEN, which does not allow you to sell the mutual funds as they are being kept for collateral for the loan amount you’ve received from the company.

After the loan amount has been fully paid, the holdings are marked as un-LIEN, which means they can be sold per your preference. However, the primary benefit of this process is not losing out on the returns of the mutual funds you already own.

Conclusion

Now you know the type of loan you should opt for in place of high-interest personal loans. Using your mutual fund holding as an asset to get the best possible personal loan is a much less known way to avail of credit facilities at a cheap interest rate. Also, LIEN marking your mutual funds opens your credit line, allowing you a specific amount of credit to be available instantly with a few clicks.

If your loan approval amount exceeds your requirement, you can un-LIEN your holdings by informing the company you’ve opted for as per the above percentage ratio. You can opt for this loan through any major company providing the loan service against mutual funds and fulfilling your goals much more efficiently.

Also If you’re looking for ways to save a lot of money on your home loan, we’ve got some great tips for you. Paying off a home loan can be a big challenge, but with the right strategies, you can save lakhs of rupees. From choosing the right loan plan to making extra payments when you can, there are several smart moves you can make. This guide – How to save LAKHS on your Home Loan, will show you how to manage your loan better, so you end up paying less in the long run. It’s all about being smart with your money and making your home loan work for you

Considering this rather than the traditional methods of opting for a loan saved you a considerable amount that could have been lost through the high-interest rate.

Frequently Asked Questions (FAQs)

Q1: Is CIBIL Score Required for Loan Against Mutual Funds?

Ans: No, as this type of loan is issued against your mutual funds, which are kept as collateral. Thus, it does not need to verify your information against your PAN Number.

Q2: What does “LIEN” mean?

Ans: LIEN is the freeze of an asset against which a debt is issued until the loan amount is paid back. Don’t worry; the asset is released after the dues are cleared, and its owner gets its rights back.

Q3: Will I get returns on my LIEN-marked Mutual Funds?

Ans:  YES, as long as your mutual funds are kept as collateral and are marked as LIEN, the returns they generate are entirely yours! You can only sell them once the whole loan amount is paid, after which they are marked as un-LIEN by the loan issuing company, and you can sell them as well.

Found the read useful? Subscribe to the LLA Newsletter “The Success Circle” for such insightful information every week and level up your financial knowledge!

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