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All About Loan Against Mutual Funds

A financial crisis, large or small, can happen at any time. It often happens that investors require money in a short period. Even if not all mutual funds offer high liquidity, you can use them as collateral for loans from banks.<br>

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All About Loan Against Mutual Funds

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  1. All About Loan Against Mutual Funds

  2. A financial crisis, large or small, can happen at any time. It often happens that investors require money in a short period. Even if not all mutual funds offer high liquidity, you can use them as collateral for loans from banks.

  3. Loan against mutual funds • Among other options, you may consider borrowing against mutual fund units as a natural alternative. The advantage here is that you don't have to redeem your units ahead of time. This also ensures that your Systematic Investment Plan (SIP) can continue smoothly. The process is similar to the overdraft facility offered by bank accounts. You can avail loans against stocks or hybrid mutual funds by going to any non-bank finance company (NBFC) or bank. In order for the bank to consider your loan application, it must pledge its mutual fund units as collateral for the debt. The loan will be granted based on the value of the units in the folio and the tenure you choose.

  4. Interest rates for loans against funds • You can repay the loan at an interest rate of 10% to 11% on mutual fund units. Of course, this will be subject to the terms and conditions set by the financier and the loan tenure. Since it is a secured loan, the interest rate will be lower than that of an unsecured loan. Also, if your credit score is good or you've been a long-time banking customer, then the bank manager might agree to a lower interest rate.

  5. Mutual fund lien • Before proceeding with the process of availing this loan, it is essential to understand the lien on mutual funds. The lien is a document that gives the bank the right to sell the fund or keep it. Therefore, if you make a claim on behalf of the bank, you give the bank ownership of the units of the fund that you own. • Then you must go to the fund house and request a lien on your units on behalf of the bank. All unit holders must sign the lien transfer request letter.

  6. How to apply for a loan against mutual funds • Many online portals sanction loans quickly and they are best digital loan against mutual funds solution if you have units in the Demat form and have prior permission. In case you physically own a fund then there must be a loan agreement with the financier / bank. The lender asks the mutual fund registrar like CAMS or Karvy to mark a lien on the number of units committed. The registrar then marks the lien and sends a letter to the lender with a copy to the borrower confirming the lien. One important thing to keep in mind is that the lien is marked based on units and not amount. You cannot redeem the units before fully repaying the loan.

  7. Loan availability against mutual funds • It is important to note that the amount of money you can borrow depends on the type of mutual fund you have. For example, share-based funds can earn you about 50% of the NAV of your funds. Some banks also have a maximum and minimum limit on the amount of the loan that you can request.

  8. How and when to remove the lien • Once the loan is repaid, the financier can send a request to the fund house to lift the lien through digital lien marking for banks. You can also enforce a partial lien removal should the financiers receive a partial payment, and this will release some units while the rest would still be under claim. The bank can reinforce the lien if the borrower does not repay the loan in the agreed term. The same goes for non-compliance as well. In such a situation, the lender requests the mutual fund to repay the units and send the check to the lender. • Loans against mutual funds are a fairly rare practice due to a lack of knowledge and information on the subject. So the next time you think of alternative ways to raise a contingency fund, remember that a loan against mutual funds may be a better option than traditional instruments.

  9. About Us • CAMS is a technology driven financial infrastructure and services provider to Mutual Funds and other financial institutions for over two decades. As the market leading Registrar and Transfer Agency to the Indian Mutual Fund industry, CAMS serves ~70% of the average assets under management – as of August 2021. We also provide technology enabled service solutions to Alternative Investment Funds and Insurance Companies. Besides serving as a B2B service partner, CAMS also serves customers through a variety of touch points such as pan-India network of service centres, white label call centre, online, mobile app and chatbot. • Website - https://www.camsonline.com/ • Loan against Mutual funds - https://www.camsonline.com/Business/LoanAgainstMF

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