The Mutual Fund Show: Should Investors Consider Loans Against Their Investments?
Yes, you can use your mutual fund units as collateral to borrow money. But, what must you consider?
Financial emergencies can arise anytime, forcing people to resort to borrowing. If you’re a mutual fund investor, you can consider loans against mutual funds.
This method is steadily gaining awareness in India, according to Santosh Joseph, founder of Germinate Investor Services. This allows investors to use their mutual fund units as collateral, providing convenient access to liquidity, he said.
Joseph spoke about the benefits of such loans. “This offers the flexibility to utilize investments without disrupting the portfolio, enabling the funds to continue working, while also maintaining access to liquidity at a lower cost than traditional options,” he told NDTV Profit.
“Loans against mutual funds can be used against any liquidity crunch,” according to Raghvendra Nath, managing director of Ladderup Wealth Management.
However, Nath said this process can be cumbersome.
“Post repayment NOC (no-objection certificate) from the NBFC (non-bank financial company) to be submitted,” he said. “The process is a little cumbersome, therefore, it is suitable when you need funds for a longer duration.”
Joseph dwelt on the advantages and disadvantages of such borrowings. “Basically, it is designed for customers to effectively handle their cash flow and allocate precisely the amount of cash they require," he said. "However, its main disadvantage is the longer processing time for transactions, in contrast to other financial products that can complete the task within seconds.”
“The interest rate depends on the asset category," Joseph said.
Nath said that the interest rates can be negotiated for loans against mutual funds. “That's where the investors can actually benefit.”
He also said personal loans or credit cards can be utilised for small amounts.
