Can you apply for loan again your mutual fund units?

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According to a recent survey by Axis Mutual Fund, 48.7% equity investors sell their mutual fund portfolios or investments within two years. According to AMFI data, 22.2% equity investors remain invested for 12 to 24 months. Meanwhile, 15.6% equity investment does not last more than 6 months…while 10.9% equity assets are invested for 6 to 12 months. These figures are as of June 30, 2023.

It is not considered right to withdraw money from mutual funds by ignoring the importance of long-term investment. For that matter you also ignore the power of compounding. Although there may be many reasons for withdrawal. Loan on mutual funds can always help you. if you need money for like 3 months to 1 year. Amount of the loan is not very large then you can take a loan on mutual funds.

Mutual fund loan is a secured loan. You can take a loan in bank or NBFC. At the time of taking the loan, a lien is created on the mutual fund. It gives the bank the right to possession or acquisition of mutual funds until the loan is repaid. The agreement ends when the loan is paid off.  In case of non-payment, the bank redeems mutual fund units kept as collateral  to recover the loan amount.

The amount of loan that can be obtained by pledging mutual funds as collateral depends on  type of scheme you are invested in. In case of equity mutual funds, loans can be obtained up to 50-60% of the net asset value (NAV), while in debt mutual funds, loans up to 85% can be obtained. For example, if the total NAV of your equity mutual fund is 5 lakh rupees today, then you can get a loan of  2.5 to 3 lakh rupees. Many banks also impose a maximum limit on the amount of loan. SBI provides loans up to a maximum of 20 lakh rupees against equity mutual funds. in case of debt funds, this limit is  up to 5 crore rupees.

The interest rate for loans against mutual funds can range from 10% to 14%. The interest rate for Axis Bank’s Loan Against Securities when applied online is 9.99%, while, for Loan Against Securities (when applied physically), ranges from 11.50% to 13.75%. Similarly, SBI charges an interest rate of 11.05% on such types of loans. Both EMI and overdraft options are available for repaying the loan. Usually, loans are given as overdrafts… Regular interest payments are required in case of overdrafts. Entire loan amount must be repaid at once when the tenure ends. Alternatively, you can repay the loan at any time during the tenure. Now let’s learn about other charges included in this type of loan.

Taking a loan against mutual funds comes with the advantage that your lump sum or SIP is not redeemed. Your long-term financial goal will be fulfilled. You will also benefit from compounding interest. Now let’s understand the benefits of compounding. Suppose you invested 1 lakh rupees in a mutual fund. It grows at an estimated return of 10%, then this money will become 1.10 lakh rupees next year. It will become 1.21 lakh rupees next year. Similarly, money will keep growing every year… In the long run, this return can be more than 10% and even up to 12 or 13%.

If you need money for a short period of time, then, you can take a loan against mutual funds but you have to keep in mind some other important things. First- it is not necessary that you will get a loan against all schemes of mutual funds. You can check on the bank’s website which schemes are eligible for loans. Second, the number of units of mutual funds taken as collateral for the loan cannot be sold until the loan is repaid. Third, you can create an emergency fund before starting your investments. This will help you avoid  any need for mutual fund redemption or a fresh loan.