Want loan against equity mutual funds: 6 dos and don’ts investors must take note of
mutual funds with the hope or rather conviction of earning some money. They can also help you meet your short-term financial needs without redeeming units in case of emergencies. You can take loans against your equity or debt mutual fund schemes to cater to your short- to medium-term requirements.
«MF units are transferable with transparent valuation, making them ideal instruments to raise money. One could continue to hold MF units to participate in long-term growth and avail tax benefits, and yet generate liquidity to meet short term fund requirements,» said Sandeep Bagla, Chief Executive Officer at Trust Mutual Funds. Borrowing against units should generally be used for meeting short-term fund requirements only and not for creating long-term leverage in the portfolio, Bagla recommended.
One must ensure that the money raised is for a short tenure and repaid in time as the interest rates on borrowings could be relatively high, he added. Typically, bonds have low volatility versus the equities, and hence one can borrow more by pledging debt mutual fund units, stressed Bagla while speaking to ETMarkets. A lender would apply a haircut on the market value of the units and provide a loan, less than the market value in case of market corrections, the Trust Mutual Funds expert said.
However, Gurmeet Singh Chawla, Director, mastertrust, has a piece of advice for investors willing to pledge their equity of debt mutual funds to avail loans. He said pledging one’s mutual fund investment as collateral for a short-term loan can be deemed a prudent alternative. However, it does not come without risks.
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