When you invest in mutual funds, you hope to grow your money over time. But sometimes, you might face emergencies or need cash fast. Selling your investments could hurt your long-term goals, so what can you do? One smart option is to take a loan against your mutual funds (LAMF). This lets you borrow money while keeping your investments.
What is a Loan Against Mutual Funds?
A loan against mutual funds helps you use your mutual fund units to borrow money. Lenders look at how much your mutual funds are worth and lend you a portion of that value. This is a great option because it allows you to get cash instantly without selling your investments, keeping their chances to grow.
It’s like having an overdraft account—you’re charged interest only on the money you actually use. These loans get approved quickly, often within just a couple of days, since your mutual funds act as security for the lender.
How Much Can You Borrow?
The amount you can borrow depends on the type of mutual funds you own. For example:
– Equity mutual funds: You can usually borrow about 50-70% of their value.
– Debt mutual funds: You can borrow up to 80-90%.
Interest rates are lower than other loans, typically between 9% and 14% per year, and your repayment term is flexible—ranging from a few months to a few years. Plus, you still own your mutual funds and can earn dividends while repaying the loan!
How to Get a Loan Against Mutual Funds
Getting a loan against mutual funds is relatively straightforward. Here’s what you need to do:
1. Choose a Lender: Banks, non-banking financial companies (NBFCs), and online platforms offer these loans. Make sure they accept your type of mutual funds as collateral.
2. Apply: Fill out an application and provide details about your mutual fund investments—like your folio numbers and scheme names.
3. Sign an Agreement: You’ll sign a form that allows the lender to claim your mutual funds if you don’t repay the loan.
4. Receive Funds: After signing the agreement, the lender will give you the loan amount.
Benefits of Loans Against Mutual Funds
These loans have many plus points:
– Quick Access to Cash: Get funds without selling your investments.
– Lower Interest Rates: These loans are cheaper than personal loans.
– Flexible Repayment: Decide how long you need to pay back the loan.
– Continue Earning: Keep earning dividends on your mutual funds while you have the loan.
Risks to Consider
While loans against mutual funds can be handy, they also have risks:
– Market Risks: If the value of your mutual funds goes down, the lender may ask you for more collateral or parts of the loan back.
– Limited Access: You won’t be able to sell or switch your mutual funds while they are being used as collateral.
– Default Risk: If you can’t repay, the lender can sell your mutual fund units.
Loans against mutual funds can be a great way to get cash quickly without hurting your investment goals. Just be careful, check your ability to repay, and compare lenders to find the best deal. By understanding these loans well, you can make smart financial choices while keeping your investments safe.
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