What are loans against mutual funds and should you opt for them? An explainer
mutual fund units, if you have invested in them, instead of redeeming them. This stands to serve two purposes. One, you get to pocket the gains accrued on your fund units without having to redeem them in the first place.
Else, if you happen to sell them in order to raise the funds, you will have to let go of future appreciation of your mutual fund units. Second, you can raise money at a lower rate of interest. For instance, Mirae Asset Financial Services offers loans against mutual funds at 9 percent against personal loans offered by banks which charge interest in the range of 11-16 percent.
This is what is usually recommended by investment advisors. “As a concept, this is a good idea but the only disadvantage is that investors are entitled to receive only 50 percent of the value of equity funds, while for debt funds, this limit is set at 80 percent," says Sridharan S., founder of Wealth Ladder Direct. He also cautions against using debt funds to raise loans because the interest on loan turns out to be higher than the return on debt funds.
“It is not a good idea to keep debt funds as collateral because the return on funds would be around 7 percent while the interest on loan would be 9 percent or so. So, one might as well redeem them if there is an emergency," he adds. 1.
Ride the bulls: When you use equity mutual funds to raise loans, you make the most of the bull run i.e., you won’t face FOMO if you sold units at the drop of a hat. The reason behind opting for raising loans is that the rate of interest is usually lower than the appreciation of fund units. 2.
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