You have carefully and steadily constructed a long-term Mutual Fund portfolio. The funds are producing fantastic returns, but you need money immediately for a short-term purpose and do not want to liquidate your investments.
An excellent alternative in this circumstance is a loan against mutual funds. It’s a convenient and efficient way to unlock the value of your mutual fund investments without liquidating them. Let’s explore everything you need to know about LAMF, its benefits, considerations, and how FinEzzy 6can help.
What is a Loan Against Mutual Fund?
Loan Against Mutual Fund (LAMF) allows investors to borrow funds against their mutual fund holdings while keeping the investments intact. Instead of selling off your mutual fund units, you pledge them as collateral to avail of a loan. The loan amount is typically a percentage of the Net Asset Value (NAV) of the mutual fund units pledged.
How Does Loan Against Mutual Fund Work?
- Eligibility: Most mutual fund schemes are eligible for LAMF, including equity, debt, and hybrid funds. However, the loan amount may vary based on factors such as the type of mutual fund, its NAV, and the lending institution’s policies.
- Loan Amount: The loan amount is usually determined based on the Net Asset Value (NAV) of the mutual fund units pledged. Lenders typically offer loans up to a certain percentage of the NAV, ranging from 50% to 80%.
- Interest Rate: The interest rate for LAMF is generally lower compared to personal loans or credit cards, as the mutual fund units act as collateral. The interest is charged only on the amount utilized and for the duration of the loan.
- Tenure: The tenure of LAMF varies depending on the lender’s policies and the mutual fund scheme pledged. It typically ranges from 6 months to 24 months (about 2 years), with an option for renewal upon repayment.
- Repayment: Borrowers are required to repay the loan amount along with accrued interest within the specified tenure. Failure to repay may result in the lender liquidating the pledged mutual fund units to recover the outstanding amount.
Benefits of Loan Against Mutual Fund
- Liquidity: LAMF provides immediate access to funds without the need to sell off your mutual fund investments, allowing you to meet urgent financial needs.
- Retention of Investments: By pledging mutual fund units instead of selling them, you can retain the potential for capital appreciation and dividends, thus preserving your long-term investment goals.
- Lower Interest Rates: LAMF typically offers lower interest rates compared to unsecured loans or credit cards, making it a cost-effective borrowing option.
- Flexible Repayment Options: LAMF offers flexible repayment options, including EMIs (Equated Monthly Installments) or lump-sum payments, depending on your financial situation and preferences.
Considerations Before Opting for Loan Against Mutual Fund
- Risk of Default: Defaulting on loan repayment can lead to the liquidation of pledged mutual fund units, potentially impacting your investment portfolio and financial goals.
- Impact on Returns: While LAMF provides liquidity, it may affect the overall returns of your mutual fund investments, especially if the loan amount is significant or the market experiences volatility.
- Cost of Borrowing: While the interest rates for LAMF are relatively lower, borrowers should consider the total cost of borrowing, including processing fees, prepayment charges, and other associated costs.
- Loan-to-Value Ratio: Lenders typically offer loans up to a certain percentage of the NAV of the pledged mutual fund units. Borrowers should assess their loan-to-value ratio to ensure sufficient liquidity and avoid over-leveraging.
How to Get a Loan Against Mutual Funds?
FinEzzy offers hassle-free and convenient loans against Mutual Fund solutions to meet your immediate financial needs. With a seamless digital process, you can avail yourself of loans against your mutual fund holdings within minutes. Whether it’s for medical emergencies, education expenses, or debt consolidation, FinEzzy provides quick and affordable financing options tailored to your requirements.
Bottomline
Loan Against Mutual Fund (LAMF) is an effective financial tool that offers liquidity, flexibility, and cost-effective borrowing options. By leveraging your mutual fund investments intelligently, you can address short-term financial needs without compromising your long-term financial goals. With FinEzzy’s innovative solutions, accessing funds against your mutual fund holdings has never been easier.
