You must have heard, “Saving for rainy days”. Imagine those rainy days has actually come. what will you do if you are not prepared for those rainy days? Financial crisis – small or big can come at any time. It happens you need money at short notice. You are running out of the money and your investment is not the appropriate fund you should look for meeting your contingency. In fact, you should not touch your investment for any contingency. It should be your last resort. But what will you do if you don’t have any option but to withdraw money from your investment? You will have to do this even if you don’t want to break your investment. You have a source of emergency fund called Loan Against Mutual Fund.
Today we will discuss the Loan Against Mutual Funds (LAMF) in detail. It is a product which helps you to meet your contingency without breaking your investment. you can use them as security to avail loan against your mutual funds.
What is Loan Against Mutual Fund?
As the title suggests, it is a loan against your mutual fund schemes. You can avail the loan against the mutual fund schemes you have in your account. You may consider the option of borrowing money against your mutual fund units as an alternative to other available loans. The main advantage of choosing this option is you don’t have to redeem your units before you actually want to. This gives protection against the probable future loss in case of your NAV of the schemes are going up. You can also continue with your periodic SIP as you are not withdrawing money or stopping your monthly investment plan. It is like taking an overdraft facility from the bank. Traditionally there are many banks and NBFC(Non-Banking Finance Company) are offering this facility known as Loan against security(LAS). You need to pledge your mutual fund units as security for the debt. The loan will be given on the basis of the value of units and tenure you choose.
The interest charged on such loan would be around 10% to 11%. Since this is the secured loan, the interest rate would be lesser than a personal loan or other unsecured loans. In LAMF you are giving your authorization to the bank that they can sell the units in case you default on the repayment terms.
The amount of loan would be decided based on the type of the mutual fund you own. For example, equity funds can fetch you around 50% of the NAV of your funds. while Balance fund can fetch you around 70% of the value of your NAV.
How to apply for the loan against mutual fund?
There are many banks and NBFCs are offering this facility. One of the largest banks in Inda HDFC bank has recently launched its digital loan against the mutual fund. Their online platform allows the user to avail the loan in less than 3 minutes.
The customer can leverage their mutual fund portfolio to avail loan for any contingency without breaking their investment. This facility is available with the partnership with CAMS. The customer has to log into myCAMS through HDFC’s website and select the funds he/she wants to pledge. On clicking the terms and conditions you will get the OTP which you need to enter into. On successful completion of the process, your LAS account will be generated and the amount will be credited to that account. This facility is open to all the customers of HDFC bank AND who is holding units of at least one of the mutual fund houses served by CAMS. Currently, CAMS caters to 60% of the total AUM of the mutual fund industry.
It has a flexibility of designing your own loan against mutual fund by choosing which assets from their portfolio would be pledged. The customer can calculate their own overdraft limit eligibility against the portfolio. The entire process is so easy and fast that you get money in your account in less than three minutes.
At present, HDFC Bank claims to have 43 million customers, expecting a good penetration due to ease of getting a credit.
Benefits of borrowing against mutual fund units
- It helps you to get the instant liquidity against the mutual funds unit you own.
- Easy to get the loan approval.
- Cheaper interest rates as its a secured loan.
- You don’t have to sell your units hence your investment will remain intact.
So next time when you need urgent fund, check this option before you decide to break your investment.