Though public and private sector banks offer this product, non-banking finance companies (NBFCs) have been more aggressive. The selling pitch for loans against mutual funds is that you do not have to liquidate your performing schemes for want of short-term funds.
In the case of equity mutual funds, individuals can get a loan up to a maximum of 50% of the scheme value. NBFCs have been offering such loans at an interest rate of 9% to 10% based on the credit score. In comparison, rates on loans against gold are at 9% to 24%, while individuals must shell out 10-18% for personal loans. The tenure for loans against MFs is mostly for 12 months and the minimum loan amount is generally ₹10,000 with the upper limit being ₹1 crore.
“We have seen investors end up selling their equity mutual fund units to raise cash for short-term emergencies. Due to this, they often do not make optimal returns from equities which is a long-term asset class and miss reaching their long-term goals,” said Krishna Kanhaiya, CEO of Mirae Asset Financial Services, which lends against mutual funds.
In the past year, assets under management of domestic mutual funds rose by 20.5% to ₹44.55 lakh crore in the last one year. The mutual fund industry added 3.1 million new investors. Data from the Association of Mutual Funds of India (AMFI) for March 2023 show retail investors hold 56.5 % of equity assets for periods greater than 24 months.
“Taking a loan against mutual funds rather than selling the units saves you from short-term capital gains tax and exit loads,” Nikhil Gupta, founder of Sage Capital.Easy Process
Lenders have made it easy for these individuals to borrow against mutual funds. They have made the entire process digital and seamless.
Executives at NBFCs said generally, the interest is charged on the utilised amount for the number of days the amount is utilised and there are no EMIs. An investor can repay the amount anytime during the loan period which is one year and also has the option to renew the loan after one year.
Financial advisors said investors must avail of these loans for purposes like medical emergencies, where the hospital is not cashless but the claim will be settled in a month or two, paying taxes or any expense for which there is a short-term cash shortage.
Pitfalls
A big disadvantage of such loans is that individuals would have to bring in a top-up in the event of a sharp drop in the stock market. In such an event, lenders will ask borrowers to bring in money to the extent of the erosion in the value of the equity mutual fund.
Analysts said while it is better than loans from unregulated entities, individuals must be aware of the other pitfalls. “When advised to take such a loan, investors should see if there is a vested interest in such advice,” said Vidya Bala, co-founder, PrimeInvestor.in. “AMCs or distributors, for example, would not want an outflow of their assets as it curtails their income.”
