Mutual fund loans are one of the most sought-after financial facilities among Indians. Owing to inflation and other financial commitments, a mutual fund loan can help you raise immediate liquidity without the compulsion to encash your investments. But it’s important to have knowledge on mutual fund loan processing fees and interest rate structures before taking this facility. This in-depth guidebook will walk you through all you need to consider about mutual fund loans so you can more easily make a decision on whether or not this is the investment for you.
What is a mutual fund loan
A mutual fund loan is borrowing funds against your mutual fund units. Rather than selling your mutual fund units, you borrow funds with your current holdings as security. The loan provides you with the liquidity without your investment remaining in the market to grow further.
This is one such loan in addition to other secured loans such as Wanda loans or property loans. Mutual funds are market-linked and therefore there is minimal risk, although Wanda funds are also extremely stable according to lenders compared to unsecured loans. You can normally take a loan of 50% to 90% of the market value of your mutual fund units depending on the policy of your lending company.
For Indian investors, a mutual fund loan can be taken for any reason — to address emergencies, personal expenses, or business requirements without affecting your long-term investment plan. As it is based on your existing portfolio, the process is quicker with less documentation to be handed over.
How mutual fund loan processing fees work
Mutual fund loan processing fees are charges levied by the lenders for documentation service in the process of sanctioning your loan. The charge pays for the mutual fund unit authentication, documentation, and account opening.
Usually, loan against mutual funds processing charge is between 0.% to 2% of the loan. For instance, when you avail a loan of Rs. 5 lakh, you might have to pay between Rs. 1,0 and Rs. 10,000 as a processing charge. The charge is usually deducted from the disbursed amount in advance or paid separately before disbursal of the loan.
Bajaj Finance and non-banking finance companies and banks usually waive the processing charge in promotional offers or for selective borrowers, but it should always be confirmed that the prevailing terms are reviewed while submitting an application. There are also lenders who charge a fixed processing charge regardless of the loan amount.
You should be aware of the impact of loan against mutual funds processing fees and interest rates since these fees reduce the amount received net and increase the effective loan cost. Always ask your lender for a complete analysis before signing any document.
Interest rate structures on mutual fund loans
Interest rates are the biggest drivers of how cheap a mutual fund loan will be. Interest rates will be lower than with unsecured personal loans since the loan is secured.
All the lenders offer floating interest rates on loans against mutual funds, i.e., interest rates are floated from benchmark lending rates. For instance, when the Reserve Bank of India alters the repo rate, the lenders also alter the loan rates. Floating interest rates range between 9% to 15% annually depending on the credit history of the borrower, lender-borrower relationship, and the size of the loan.
Very few of the lenders give fixed rates of interest, which are not modified for the entire duration of the loan but a little more for the early tenure. The tenure in mutual fund-based loans may vary from 6 months to 3 years.
Standard rate of interest can be the monthly declining balance calculation, i.e., interest on the current balance and not on the original amount of the loan. This keeps EMIs low in the long run and lowers the total outgo of interest.
Always ask for the prepayment fee if you need to pay off the loan before the time. Banks levy charges on a few loans, but some have no-prepayment-cost loans.
Eligibility and process of applying for mutual fund loans
To avail a loan against a mutual fund, you will be required to be aware of the eligibility, which is typically mutual fund unit holding and creditworthiness.
The applicants should have the mutual fund units in their name for a duration of 6 months to 1 year, as per lender’s policy. The mutual funds should be in the applicant’s name so that they can become eligible for pledging.
Financial institutions like Bajaj Finance require a good credit score, usually above 700, to return the money on schedule. Moreover, residence and income source proof, along with identification documents, is a part of the application process.
The procedure for the lender is simple. You furnish your identification papers and mutual fund statement, and the lender checks your holdings and sanctions your loan request. The lender impresses a lien upon your mutual fund units after sanction. You still retain them but cannot redeem pledged units until your loan expires.
Disbursal of the loan is also rapid in most cases, even 24 to 48 hours in some, as the collateral balances the risk analysis of being too slow.
Advantages and disadvantages of borrowing a mutual fund loan
Mutual fund loans have some advantages but then also a few disadvantages. To know both facilitates an informed choice.
Advantages:
- Access to money at ease without liquidating investments and losing future growth opportunities.
- Lower interest rates than unsecured personal loans since your mutual fund units serve as collateral.
- Faster processing due to less risk taken by lenders.
- Options of tenures and payments.
- No incidence of capital gains tax since you are not selling units as is the scenario with redemption.
Disadvantages
- Your units in the mutual fund may decrease in value if there are declining markets, impacting your loan-to-value (LTV) ratio.
- If LTV goes beyond NAV, lenders ask for additional collateral or part payment.
- Your holding does not change, but your units are under pledge and cannot be used for emergency redemption.
- Non-repayment can result in the sale of your mutual fund units by the lender.
- You need to equate market risk and loan repayment at the same time.
Knowing these factors avoids shocking you and can plan money against mutual funds’ loan in the proper manner.
Comparison of interest rate and processing fee on loans against mutual funds by lenders
There are many banks and NBFCs in India that provide loans against mutual funds, and their interest rate and processing fee plans are very different.
For example, SBI provides loan against mutual fund units at a minimum interest rate of about 10% annually. Their processing fee may be around 1% of the loan size, and they can provide a highest loan-to-value of 75%.
Bajaj Finance stands out as they have a high repayment tenure and interest rates of 11% and more. They have a processing fee that is generally in between 0.5% and 1%, and there are offers that waive off the processing fee on festivals or for salaried customers.
There are other NBFCs that will lend at a higher rate of interest, i.e., above 13%, but with less documentation and fast processing. The financier is chosen depending on your credit history, loan duration, and rebates on processing fees.
Compare not just the interest rate and processing charge, but also the prepayment charge, late charge charges, and customer service integrity.
Mutual fund tips for smart borrowing
To best achieve the purpose of your mutual fund loan, remember these tips:
- Take only what you require — taking too much creates unnecessary repayment stress.
- Have a buffer fund for EMI repayments, particularly in case of a market downturn when unit value swing happens.
- Keep your loan-to-value ratio low and be ready for auto top-up collateral charges.
- Prepayment to save your credit score.
- Avoid premature redemption of units pledged — schedule withdrawals at loan maturity.
- Carefully read your loan agreement, particularly processing charges and interest rate fluctuation provisions.
Employing mutual fund loans as a short-run liquidity facility and not long-term borrowing means lower interest outgo and less financial pressure.
Mutual fund loans provide you with a great method of securing instant money without selling long-term investment. Knowing the facts about the mutual fund loan rates and processing fees is essential to make informed decisions and not pay for unnecessary expense in ignorance. Even though these loans provide you with lower interest rates and quicker approval processes than unsecured loans, they involve some level of risk because of market variability.
If utilized judiciously, mutual fund loans are a smart financial decision to meet emergencies or fund personal objectives. Never neglect comparing a handful of lenders such as Bajaj Finance to get accurate interest rates and processing charges. Keeping track of repayment timelines and self-control over credit will make your lending experience pleasant and hassle-free.
Tap the power of your existing mutual fund investment by opting for loan facilities, and satisfy your funding requirements without jeopardizing your savings plan.
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