How To Use Mutual Funds As Collateral For A Loan?
Need cash instantly but breaking your assets is not an option! If you have mutual funds, there is a solution that keeps your savings safe while giving you quick access to funds. You can get a loan on mutual fund and use those units as collateral.
It is like a personal loan, but instead of income alone, you back it with your existing mutual fund portfolio. This method is smart, fast, and cost-effective for many borrowers.
What Is A Loan On A Mutual Fund?
A loan on mutual fund is a secured loan where your mutual fund is hocked to a lender. These can be either deficit funds, equity reserves, or mixed funds. Based on the fund type and current value, the lender decides how much to offer.
Usually, you can get up to 70 per cent of the value as a loan. This loan can be used for anything travel, business, education, or emergencies.
The best part is your funds stay invested. You continue to earn returns while using the borrowed money.
How Is It Different From A Personal Loan
A personal loan is unsecured. It is based on your credit score, income, and job profile. Interest rates are higher because of the risk.
On the other hand, when you apply for a loan on mutual fund, you provide security. This reduces the risk for the lender. That is why such loans usually have:
- Lower interest rates
- Faster approval time
- Longer repayment flexibility
It is ideal for people who want money quickly but do not want to close or redeem their investments.
How To Apply?
Getting started is easy. Most banks and apps now support the digital pledging of mutual funds. Here is a simple guide:
- Log in to your preferred loan app or banking platform.
- Select “Loan against Securities” or a similar option.
- Choose “Mutual Fund” as the security.
- Enter your fund portfolio details.
- Select the loan amount and tenure.
- Submit and wait for approval.
Once approved, the money is credited directly to your account.
Things You Should Know
Before you take this step, here are some important points:
- Not all mutual funds are accepted. Liquid and equity funds are preferred.
- If the fund value drops too much, you may need to pay extra to maintain the margin.
- You cannot redeem the pledged funds until the loan is closed.
- Regular interest needs to be paid, just like any other loan.
Using this method for a short-term requirement is usually safer than redeeming long-term investments.
Benefits At A Glance
- Keep your investments active.
- No need to liquidate for short-term needs
- Lower rates compared to credit cards or personal loans
- Completely digital in most cases
- Flexible repayment based on your cash flow
This is why more investors are choosing this route during cash crunches.
Final Word
Using mutual funds as collateral for a loan on mutual fund is a smart way to handle your finances. It helps you avoid breaking investments and keeps your long-term goals intact.
When planned well, this is better than applying for a personal loan, especially when you already have a solid mutual fund portfolio.