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Loan Against Mutual Funds and Shares

Loans against mutual funds and shares

Raising money against a mutual fund and shares allows you to use your investments as security for a loan, increasing your chances of success. These facilities are less common than other types of loans, such as personal loans and secured loans, but nevertheless, have an important role for those looking to leverage their investments to raise money.

In this article, we will explain everything you need to know about this type of loan. We will cover the benefits, the risks, and how to get one!

What is a loan against mutual funds?

A loan against mutual funds is when you borrow money from a bank or financial institution using your mutual fund as collateral. The interest rate on these loans is usually lower than other types of loans, such as personal loans as security is being offered, meaning the lender’s cash is at less risk should you fail to repay the loan.

These loans work by allowing the bank to use your investment as security for the loan, and then they will give you the money that you need. The good thing about this is that you still get to keep your investment, and you can use the money for whatever you need.

We mean both equity mutual funds and debt mutual funds by mutual funds. Both can be used as collateral for a loan. This could be something like a down payment on a house or a car or even to consolidate other debts in your own life.

The downside of this type of loan is that if you cannot repay the loan, then the bank can sell your units to make up for the money that you owe them. This means that you could lose your investment entirely.

How does a loan against mutual funds and shares work?

To get a loan against mutual funds, you will need to approach a bank or financial institution and let them know that you want to use your investment as collateral.

The bank will then appraise the value of your investment and offer you a loan based on that amount. The interest rate on these loans is usually lower than other types of loans, such as personal loans.

However, if you cannot repay the loan, then the bank can sell your units to make up for the money that you owe them. This means that you could lose your investment entirely.

Hence, it is important only to take out a loan against mutual funds if you are confident in your ability to repay it.

You can get a loan against your mutual fund units by approaching a bank or financial institution and letting them know that you want to use your units as collateral. This is a relatively specialist product, so maybe handled through a specialist team, rather than in a branch.

How much does it cost to get a loan against mutual funds and shares?

The cost of taking out a loan against mutual funds or shares is made up of both interest and fees. Although the costs vary depending on the loan required and your circumstances, typically you’ll pay interest and fees of around 5-7% per year.

There may also be a processing fee that can sit anywhere between the 0.5-0.7% mark as well. So, for example, if you’re taking out a loan for £100,000, you could end up paying £5,000-£7,000 in fees and interest each year.

As we mentioned before, if you cannot repay the loan, then the bank can sell your units to make up for the money that you owe them. This means that you could lose your investment entirely. If this happens, you will not only have to repay the loan, but you will also lose any money that you would have made from your investment.

How long is the term of a Loan Against Mutual Funds and Shares?

The term of a loan against mutual funds or shares is usually between one and five years. This means that you will have to repay the loan, plus interest and fees, within this time frame.

If you cannot repay the loan, then the bank can sell your units to recoup the money that you owe them, which could result in the loss of your investment.

It is important only to take out a loan against mutual funds if you are confident in your ability to repay it within the agreed-upon time frame.

How to apply for a Loan Against Mutual Funds and Shares?

Applying for a loan against mutual funds or shares is relatively straightforward. You will need to approach a bank or financial institution and let them know that you want to use your units as collateral.

The bank will then appraise the value of your investment and offer you a loan based on that amount. The interest rate on these loans is usually lower than other types of loans, such as personal loans.

You will need to fill out an application form and provide the bank with some documentation, such as your ID, proof of income, and proof of investment.

It is important to only take out a loan against mutual funds if you are confident in your ability to repay it. You can get one of these from most banks in whatever country you’re in.

Now, you may be wondering whether you need to fulfil any special qualifications to get a loan against mutual funds and shares?

The answer? Nope! Just about anyone can get a loan against their mutual fund units. The only exception is if you’re under the age of 18, as you’re not legally allowed to enter into a contract in most countries.

In the UK, you may be able to get this kind of loan from lenders like;

  • Barclays
  • HSBC
  • Lloyds
  • Bank of Baroda
  • State Bank of India
  • Santander.

What are the advantages of Loan Against Mutual Funds and Shares?

There are a few advantages of taking out a loan against your mutual fund units. 

Firstly, the interest rates on these loans are usually lower than other types of loans, such as personal loans. You’re also more likely to get accepted for the loan because there is collateral going up, rather than having to base your loan application on your credit score.

Secondly, it can be a quick and easy way to access cash if you need it. The application process is relatively straightforward, and you can usually get the money within a few days.

What’s more, you can continue to earn money from your investment even while you have a loan against it. This is because the bank will only sell your units if you cannot repay the loan, which means that you can still benefit from any gains in the value of your investment.

Finally, it can be a good way to diversify your investment portfolio as you’re essentially using your investment as collateral for the loan.

What are the disadvantages of Loan Against Mutual Funds and Shares?

There are a few disadvantages of taking out a loan against your mutual fund units. Firstly, if you cannot repay the loan, then the bank can sell your units to make up for the money that you owe them. This means that you could lose your investment entirely.

Secondly, if you miss a payment, then your investment may be at risk

What’s more, the interest rate on these loans is often variable, which means that it can go up or down over time. This means that your monthly repayments could increase if the interest rate goes up.

Lastly, the term of these loans is usually quite short, which means that you will have to repay the loan, plus interest and fees, within a relatively short period of time. If you can’t keep up with the repayments, you could end up in financial trouble and paying more than you intended in fees and late payments.

For reference, here’s a table with a breakdown of the advantages and disadvantages.

Advantages of Loan Against Mutual Funds and SharesDisadvantages of Loan Against Mutual Funds and Shares
it can be a quick and easy way to access cash if you need it.the interest rate on these loans is often variable, which means that it can go up or down over time. This means that your monthly repayments could increase if the interest rate goes up.
it can be a good way to diversify your investment portfolio as you’re essentially using your investment as collateral for the loan. the term of these loans is usually quite short, which means that you will have to repay the loan, plus interest and fees, within a relatively short period of time.
 the interest rates on these loans are usually lower than other types of loans, such as personal loans.if you miss a payment, then your investment may be at risk
You are more inclined to get loan approval because you have collateral in place, rather than a credit score.