Financial uncertainties are common, and they can strike us at any given moment. In such situations, procuring a loan becomes the most viable solution. But what if you cannot meet the eligibility criteria for a typical loan product or do not wish to risk foreclosure of your valuable assets? This is where the concept of a ‘loan against mutual funds’ comes into play as a source of potential funding. Today, we delve into this less common but beneficial route, understanding the benefits, prerequisites, and how to make sense of the loan against securities calculator.
Loan against Mutual Funds Explained
Many people have invested money in mutual funds as a means of growing their wealth. But these funds can also act as collateral when applying for a loan. Due to the inherent flexibility and benefits they offer, loans against Mutual Funds are increasingly popular amongst individuals who require funds in the event of contingencies.
When procuring a loan against Mutual Funds, the mutual fund units are locked in as collateral with a lien marking process. The individual could borrow up to 70%-90% of the net asset value (NAV) of the Mutual Fund units. The investor may continue to earn on his units, even when they are pledged as security.
Advantages of Loan against Mutual Funds
A key advantage of loans against mutual funds is they allow the investor to leverage their existing investments and meet personal or business-related funding needs. They prevent the need to prematurely withdraw the mutual fund investment and potentially lose out on earning a return or paying hefty penalties or capital gain tax.
Moreover, these loans have minimal documentation, quicker approval times, offer competitive interest rates, and provide the flexibility to service only the interest with the principal amount to be repaid at the end of the loan tenure.
Eligibility Criteria for Loan against Mutual Funds
The primary requirement to apply for this loan is to have a robust mutual fund portfolio that’s sufficient to act as collateral for the loan amount required. Moreover, since the mutual funds are kept as collateral, the credit score or the income parameter becomes less critical in this scenario.
Understanding Loan against Securities Calculator
A loan against securities calculator is an online tool that can help you ascertain the eligibility and the potential loan amount you can acquire against the pledged mutual funds. The calculator considers various factors such as the nature of your mutual fund units, their quantity, and the NAV. By entering these details on the form, you’d get an approximate loan amount you’re eligible for. The calculator makes the whole process less complicated and helps you make informed borrowing decisions.
Risks and Precautions
While a loan against mutual funds can be a fantastic financing option, borrowers should also be aware of the potential risks involved. In a volatile market condition, if the fund’s value drops significantly, the lender might ask for additional collateral. In the absence of which, the lender may decide to sell off a portion of the mutual funds. Thus, getting the advice of an investment advisor to help mitigate such risks is required.
Also, the borrowers must read all terms and conditions and ensure they understand the repayment conditions, interest rate structure, processing fees, and any other charges applicable.
A loan against mutual funds could be the ideal way to meet your financial needs without breaking your investments. Being an informed investor and understanding the associated risks is of prime importance before making any decisions. So, conduct extensive research, hone your understanding of the loan against securities calculator, and then take the leap.
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