How does a loan against mutual funds work?

“There is always something coming in a few months that will cost money, so be financially prepared.”

Life is uncertain, isn’t it? Life is full of unexpected emergencies and financial tribulations. You can’t run away from this, but you can be PREPARED to face it.

As an investor, you know that investing in funds is known to be liquid, but not all funds are highly liquid. Secondly, if your financial goals are directly related to your investments, you may not want to liquidate them to avoid interruptions.

To meet your monetary shortcomings, what could you do in such a situation? There are many ways to borrow money against property, gold, cars, houses, car loans, etc. But what about borrowing against mutual funds?

Is this a viable option?

Let’s find out!?

What do you mean by Loan Against Mutual Funds?

In recent years, the financial landscape in India has witnessed a surge in innovative financial products, providing individuals with diverse options to meet their monetary needs. One such avenue gaining popularity is the 'Loan Against Mutual Funds (LAMF). This financial instrument combines the benefits of mutual funds with the flexibility of obtaining a loan, offering a convenient solution for those in need of quick funds without liquidating their investments.

Due to its secured nature of investment, it is one of the easiest ways to meet your cash crunches!

An overview of risks and considerations

• Market Volatility:

Since the loan amount is linked to the market value of the mutual fund units, fluctuations in the market can impact the loan-to-value ratio. If the value of the mutual fund units falls significantly, borrowers may be required to pledge additional units or repay a portion of the loan to maintain the prescribed LTV ratio.

• Interest Costs:

While interest rates may be lower compared to other forms of credit, borrowers should carefully consider the total interest cost over the loan tenure. It is essential to evaluate whether the benefits of maintaining investment exposure outweigh the interest expenses.

• Partial Liquidity:

Although LAMF allows investors to retain their mutual fund investments, it involves partial liquidation since units are pledged as collateral. This may impact the potential returns on the remaining units over time.

How does a loan against a mutual fund work?

?Disclaimer: The above information should not be relied upon for personal or financial decisions, and you should consult an appropriate financial professional for specific advice. The information presented under our newsletter and blogs is solely for informational purpose