Need urgent cash? You can raise loan against mutual funds. Details here

What if there is an immediate need for money to renovate the house or pay for a vacation but most of your money is already locked up in the joint venture?

One of the possible ways to solve the problem is to bail out the treasury department while the other option is to borrow money from the bank to pay them off.

Wealth advisors say that instead of saving existing savings, one can borrow from these mutual funds to keep long-term financial goals intact. Also, when one redeems the securities prematurely, one has to give up the potential future returns from these investments.

“Let’s say mid cap or small cap funds give 15 to 18 percent returns over 3 to 5 years. If you only pay 10 percent interest on the loan, you can still make 5 to 8 percent alpha. Conversely, if you sell the units instead of investing, you lose the opportunity to make the profit,” said Sridharan Sundaram, SEBI registered investment advisor and founder of Wealth Ladder Direct.

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Preeti Zende, a SEBI-registered investment adviser and co-founder of Apna Dhan Financial Services shares a similar sentiment.

“Mutual funds can help whenever you need money. Instead of saving your savings that are being built for long-term financial goals, you can borrow from these mutual funds. The interest rate on these loans is lower than that of personal loans. So, it’s a good choice,” he said.

“Several online platforms offer instant loans. Deposit loans are also offered there but it is better to take a loan from a good bank or NBFC. Therefore, it is better to contact only known sources and not rely on applications that provide easy credit,” he said.

How does it work?

Loans for funds (LAMF) are often offered as a place of purchase where you have to provide the money as a guarantee to the institution and in return, a person receives a place – shop. Overdraft limits are usually 50-60 percent of the market value of the fund and 80-85 percent of the amount owed.

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Based on the requirements, a person can use the money within the limits of the overdraft facility – and the interest is charged only on the money used.

Interest rates vary from institution to institution and usually hover around 9-10 percent per year.

An array of options

There are a number of options available when looking for a savings account loan. One such option is adoption from traditional financial institutions like major commercial banks – SBI, Bank of Baroda or HDFC Bank while there are NBFCs (non-banking financial companies) and digital platforms offering such loans. .

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These include Tata Capital, Dhanlap and Mirae Asset Financial Services.

Loan interest

One of the main advantages of a mutual fund loan (LAMF) is that borrowers do not need to redeem their collateral, which can provide much higher returns in the long run if compared to the interest rate charged on the loan. cooperative group.

Securities loans are also convenient because you do not need to show proof of income, payslips or letters 16. get money from units fund. Generally, this makes sense in the case of equity funds, but in the case of debt funds, the situation changes and therefore, it may not be as financial as in the case of equity funds. ,” Sridharan said.

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First published: December 27, 2022 at 1:03 PM IST

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