If you are living in a metro city, managing finances can sometimes become challenging, especially when unexpected bills pile up. While many individuals may think of traditional loans or credit cards to cover expenses, there’s another lesser-known option that offers quick liquidity: taking a loan against mutual funds. But is it a smart choice to use this method for paying your bills?
What is a Loan Against Mutual Funds?
A loan against mutual funds (LAMF) allows you to borrow money by giving your mutual fund units as collateral. Banks or financial institutions provide this facility, where the loan amount is determined based on the value of your mutual fund holdings. Typically, you can borrow up to 50-60% of the Net Asset Value of your equity mutual funds and up to 70-80% for debt mutual funds.
Why Consider a Loan Against Mutual Funds for Bill Payments?
Here are some key reasons why people might choose a loan against mutual funds:
a. Immediate Liquidity: LAMF provides a quick way to arrange funds without liquidating your investments. If are in urgent need of money and need to clear urgent bills this option offers immediate relief.
b. Lower Interest Rates: Compared to personal loans or credit card debt, loans against mutual funds often come with lower interest rates. Since the loan is secured by your investments, lenders offer competitive rates.
c. Flexible Repayment: Most lenders provide flexible repayment options. You can repay the principal amount along with interest in EMIs or choose to pay only the interest during the loan tenure and clear the principal at the end.
d. No Prepayment Penalty: Many lenders do not charge penalties if you decide to repay the loan earlier than the stipulated term.
When is Taking a Loan Against Mutual Funds a Good Option?
While loans against mutual funds provide you with numerous benefits, they are not suitable for every situation. Here are cases where it may be a smart move:
a. Urgent and Short-Term Loan in Pune Needs: If you have urgent bills to pay and expect to repay the loan quickly, this can be a cost-effective option.
b. Lower Borrowing Costs: If you have a loan on mutual funds and don’t want to opt for high-interest options like credit cards, LAMF is a more affordable choice.
c. Avoiding Liquidation of Investments: If the market conditions are favorable, selling your mutual funds might cause you to miss out on growth opportunities. Taking a loan allows you to keep your investments intact.
Things to Take Care of Before Taking a Loan Against Mutual Funds
a. Loan Amount is Limited: The loan amount depends on the NAV of your mutual fund holdings. If your bills exceed the loan eligibility, this option might not be sufficient for you.
b. Market Risk: Mutual funds are subject to market fluctuations; you cannot completely rely on your mutual fund's holdings. If the NAV of your pledged mutual funds drops, the lender may ask for additional collateral.
c. Impact on Future Financial Goals: While you retain ownership of the funds, pledging them as collateral ties them up until the instant loan in Delhi is repaid. This could affect your future financial goals.
d. Repayment Capacity: Like any other loan, you need to ensure timely repayments. Failure to repay can result in the lender liquidating your pledged mutual funds.
e. Interest Costs: Although interest rates are lower than unsecured loans, they can still accumulate over time if the repayment period is long.
Conclusion
Taking a loan against mutual funds can be a practical solution for urgent bill payments, provided you can repay the loan on time and avoid market risks. It is an excellent option for those who want to retain their investments while gaining access to immediate liquidity.
However, it’s important to evaluate your financial situation, repayment capacity, and the cost of borrowing before making a decision. If the bills are manageable and you have other sources of funds, it might be better to explore alternatives. On the other hand, if you need urgent cash and want to protect your investments from untimely liquidation, a loan against mutual funds can be a viable and cost-effective solution.
Also Read: What Are the Advantages of Choosing Instant Loan Services Over Traditional Bank Loans?