Loan against mutual fund units: What happens when returns fall? Key points to know

financialexpress.com:

If you own mutual fund units, you can take a loan against them instead of going for a personal loan. While one should go for any kind of loan only when it can’t be avoided, borrowing against mutual fund units would make more sense in case of any urgency because of lower interest rates compared to personal loans.

However, there is a risk of borrowing against mutual funds that borrowers should know. Let’s understand this with an example.

Suppose you pledge a part of your mutual fund units to get a loan from an NBFC or financial institution. The price of each unit pledged is higher at the time of borrowing but as the loan starts the price falls considerably. What will happen now?

Krishna Kanhaiya, CEO of Mirae Asset Financial Services, says that when the price of a mutual fund unit falls considerably, the borrower’s eligibility limit for the overdraft account drops. Further, if the revised eligible limit is less than the utilised amount then the account becomes overdue and needs to be regularised.

“If the value of the security drops considerably, in such an event the eligible limit of the overdraft account drops and if the revised eligible limit is less than the utilised amount then the account becomes overdue and needs to be regularised,” says Kanhaiya.

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Borrowers should keep in mind the above risk before going for a loan against mutual funds. Further, there are several other important points that borrowers should factor in. In an email interaction with FE Money, Kanhaiya shared some of the key points that borrowers should know. Let’s have a look:

Borrowers should be aware of the maximum and minimum loan amount, eligibility criteria, loan tenure, Loan to