Need money for short term? Loan against mutual fund is a quick and cheaper option

 

Need money for the short term  A loan against a mutual fund is a quick and cheaper option




Need money for the short term? Loan against a mutual fund is a quick and cheaper option: In case of a grave contingency, the fund requirement may exceed the amount kept in an emergency fund and one may not be left with any other option but either to liquidate his/her investments or to take a loan.

However, liquidating investments abruptly may derail the fulfillment of long-term financial goals, while taking a loan involves interest payouts. So, one needs to make an informed decision on whether to take out the money invested for long-term goals or to take a loan.

Liquidating investments vs taking loans

The decision will depend on the earning prospect through an existing investment, vis a vis the rate of interest payable on a loan – apart from the fact the difficulty one may face in availing of a low-interest loan.

So, in case you have a debt-oriented mutual fund (MF) scheme giving an average CAGR of around 5 percent, it will be better to redeem it, rather than take a loan at 10 percent interest.

On the other hand, if you have an equity-oriented MF scheme having a prospect of giving a 15 percent CAGR return in the long term, it would be better to take a loan at 10 percent interest, rather than redeeming the fund.

Finding a cheaper loanUnsecured loans – like personal loans – are expensive in comparison to secured loans – like home loans, auto loans, loans against securities, etc. As home loans and auto loans can’t be used for any other purpose but to buy a home and a vehicle respectively, a loan against securities is the best option to borrow money to meet the requirement during an exigency.

With a diversified portfolio and the prospect of generating higher long-term returns, equity-oriented MF schemes are one of the best options, against which financial institutions generally issue loans readily at an attractive rate. Moreover, your investments through a Systematic Investment Plan (SIP) will continue uninterrupted even after taking a loan against the MF scheme.

How to avail loans against MF

In case you are making online investments, you may avail of paperless loans against the MF units almost instantly with prior approval. In the case of physical investments, sanctioning loans may take a bit longer, as a loan agreement with the financier/bank should be in place.

However, you need to pledge your MF units as security to avail of the loan, which would create a lien against the units pledged for the purpose. The lien will only be removed, once the loan is repaid. You may ask for partial removal of the lien, in case of part repayment of the loan.

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