June 22, 2024

Personal loans and other forms of unsecured loans can be quite expensive as compared to other forms of secured loans such as home loans, loan against properties etc. Interest rates on unsecured loans can be anywhere between 14%-18% which is quite high and expensive. Also, most people will not be comfortable mortgaging properties worth crores for a small loan of few lakhs. In such a case, what option do borrowers have? A simple solution to this problem is a loan against mutual funds in your Demat account.

What is a Demat Account?

A dematerialised account popularly known as a Demat account is a form of account used to hold, trade and transact shares and securities in electronic form. While trading in stocks and securities online, shares and securities are purchased and held in a Demat account, and thereby facilitating an easy trade for the users. A Demat account can hold all forms on securities investments such as shares, exchange -funds, bonds government securities, and mutual funds in one single place. Many banks and DPs are now offering investors to open a Demat account online for free.

What are Mutual Funds?

Mutual funds are an investment fund which pools money from several investors to invest in securities or another form of investments. Mutual funds are professionally managed,and the primary purpose of a mutual fund is to generate profits or return on investments for the investors to the fund.

There are several forms of mutual funds in India such as money market funds, fixed income funds, equity funds, debt funds, balanced funds, index funds, speciality funds, tax-saving funds, open-ended funds, close-ended funds, growth funds etc. Investors can select any type of mutual funds which suits there investments needs, risk appetite and long-term investment goals.

Mutual fund holders can be converted their mutual fund units into dematerialised form and hold them in their Demat accounts.

What is Loan against Mutual Funds?

Loan against mutual funds is a form of secure loan obtained from a bank or any other financial institution, wherein the loan is obtained in lien of the mutual funds lying idle in an investor’sDemat account.

Mutual fund investments are usually long-term investments and come with a lock-in period before which an investor cannot liquidate or cash out their mutual funds. In any event an individual requires urgent funds or any form of short-term borrowing, loan against mutual funds is an excellent option for them.They are not required to pay high rate of interest of unsecured personal and business loans or mortgage or hypothecate their property which can be multiple times the value of the loan required by the individual. The individual can avail loans against their idle mutual funds by allowing the lender to charge a simple lien on their mutual funds in their Demat accounts.


How to Apply for a Loan against Mutual Funds in your Demat Account

The application of a loan against mutual funds in Demat accounts is a fairly simple and quick process, unlike in the case of physical mutual funds units held. In case of physical mutual fund units, the borrower is required to fill a physical loan application form, execute a loan agreement with the bankers or financial institution, register the lien of mutual funds, complete KYC formalities, credit checks etc.

Whereas, individuals with mutual funds in Demat form can simply log-in to the online portal of the lender or financial institution which offer quick and speedy processing and approval of your loan against mutual funds. In both cases, the bank or the financial institution will write to the mutual fund register such as Karvy or CAMS and inform them regarding the loan and request them to mark a lien on a specific quantity of mutual funds units held by the borrower.The registrar will mark a lien on the pledged units and issue a letter to the lender and investor to confirm the lien has been marked on a particular number of units.

How much loan can be availed against Mutual Funds?

The financer will generally lend 50-70% of the net asset value of the units pledged by the borrower, depending upon their lending policy and type of mutual fund units being pledged for obtaining the loan. There might not be an upper limit in obtaining loans against mutual funds, but this type of loan is mainly suitable for meeting short-term requirements and borrowing small amounts. Borrowers can avail loans at an interest rate of 10-12% per annum depending upon their credit rating, lenders base rate, loan amount and duration, type of mutual fund pledged etc.

How to remove Lien on the mutual funds unit?

Borrowers can request the lender for removal of lien on their mutual fund units once the loan has been repaid in full. Borrowers can also request for partial removal of thelien based on the loan repayments made.

What Happens in a borrower is unable to repay their loan?

In an unfortunate event a borrower is unable to repay their loans to the banks or the financial institutions, as per the loan agreement, the financial institution or the bank can enforce the lien and send a written request to the mutual fund house for the redemption of the units. The proceeds from the redemption of units will then be sent to the banks or the financial institution.

The advantage of Loan against Mutual Funds

  • It is a simpler and easy way to obtain short-term and immediate lending.
  • Idle Mutual funds can be used as security for obtaining loans at a low rate of interest when compared to an unsecured personal loan.
  • As some mutual funds cannot be liquidated before a certain lock-in period, loan against mutual funds is an effective method for raising capital without breaking into or redeeming your mutual funds.

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