How to avail loans through mutual funds

28-10-2017 Sat 12:57 | Investments

Availing loans was a painful affair in earlier times. Guarantors, sureties etc, were necessary. You would have to run from pillar to post for the loan. Now there are many means and ways to avail loans. One among them is on mutual funds. If you have invested in mutual funds, there is no need for selling and you can avail loans on them.

The number of those investing in mutual funds for long term gains and attaining of goals, is increasing. Also, there are those who withdraw these investments, during emergency situations. This will dissolve the goals or aims for which the mutual funds were started in the first place. Without causing breaks in the achievement of your dreams, you can take loans through mutual funds. There will not be any hurdles to the capital investments. No need to stop the investments through SIP.

Loans through pawning

A majority need loans for three months or for a year. In such cases, you can avail loans by pawning your mutual fund units with banks. Or you can approach a Non-Banking Finance Company (NBFC). You can avail loans on mutual funds, as an overdraft, for small needs. The interest rate depends on the amount offered as loan. Usually it is between 10 to 11 per cent. At least 60 per cent of the mutual funds investments can be availed as loan. The rights over the pawned mutual fund units is transferred to the lending authority. So until the loan amount is cleared there is no chance of transferring or selling the mutual fund units. It is advisable to take loans on equity funds, rather than on debt funds.

Where to avail

Online agencies also offer loans. If the mutual fund units are in demat form, you should obtain permission to pawn them. If they are in physical form, an agreement has to be made beforehand with the lending authorities. These will confer with CAMS or Karvy organisation, where the mutual funds are registered. It will inform that the mutual fund units with a particular folio number are pawned and they should kept in 'lean.' A letter will be sent to the investor or the lending authority to this effect.

When the loan is cleared

When the loan is cleared, the lending authority will itself seek the registrar to release the mutual fund units from its purview. Sometimes, a part of the mutual fund units are released, as soon as some portion of the loan amount is cleared.

On failure to clear the loan

Banks or NBFC agencies will take over the mutual fund units, in case the loan is not cleared. It will notify for redeeming them. Then the fund house will sell the units and send a cheque to the lending authority.