Banks offer loans for mutual funds, which have the same characteristics as loans for stocks. Nowadays of course, there is also the digital loan against OPC, which is fast and takes less time.
How Do Mutual Fund Loans Work?
If you go for digital loans against mutual funds, you can pledge your mutual funds with any online bank and get overdraft instantly. The advantage is that it is not necessary to liquidate your mutual funds. However, if you do not repay the loan, the bank has the right to properly treat your pledged mutual fund units to recover their amounts.
Most banks have a maximum and minimum amount for the loan. For example, the State Bank of India has prescribed a maximum loan limit of Rs 20 lakhs against mutual fund shares. On the other hand, the minimum loan amount is Rs 20,000.
Margin for mutual fund loan
It is important to note that a 50% margin is required to pledge your mutual fund units and take out a loan. So, if you want to avail a loan of Rs 10 lakhs, you have to pledge mutual fund units with a minimum value of Rs 20 lakhs.
Most banks are unlikely to lower or lower the limits.
What are the interest rates and loan processing fees for mutual funds?
Interest rates on loans against mutual funds would vary from bank to bank. The State Bank of India’s effective interest rate for the loan translates to 9.75 percent per annum. This is much better than the interest rates on personal loans, which could reach 16%. SBI charges an interest rate of 11.90 percent on the loan against the National Savings Certificate and Kissan Vikas Patra.
Should You Get a Loan Against Mutual Funds?
Interest rates on any pledged instrument or property are much lower because the bank has collateral. However, one must be able to repay the loan amount as the bank can sell and cash the pledged instrument.
Besides interest rates, there are also processing fees charged by most banks. The processing fee is around 0.75% in the case of State Bank of India.
If you are able to repay the loan amount, the mutual fund loan is the best bet. Interest rates are much lower these days which is another added bonus. Check and compare interest rates against mutual fund loans before investing.
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Article first published: Sunday, September 20, 2020, 11:52 a.m. [IST]