Loans against mutual funds: What makes it better option than personal loan

The interest rates on mutual fund loans vary from 10-12% per annum. While personal loans carry interest rates over around 15 to 20 per cent depending upon various other factors.

The loan against mutual funds are backed by a collateral or a security and hence has a lower interest rate as compared to personal loans. Pixabay

Seeking a loan? Which is a better option among loan against mutual funds or a personal loan? Well, loans against mutual funds allow you to borrow by putting your mutual fund investment as collateral with a financial institution and as the loan is backed by an asset class, interest rates are usually lower than that of a personal loan. The interest rates on mutual fund loans vary from 10-12% per annum. While personal loans carry interest rates over around 15 to 20 per cent depending upon various other factors. One cannot redeem the mutual fund units as long as they are pledged with the bank or the fina and the bank can redeem it in case of default.

Jitendra Solanki, Investment Adivsor told Zee Business Online, ''Each bank offers a loan against mutual fund as per a list of approved mutual funds. It is an agreement which gives bank to own, sale and hold your investments. The institution has a complete right to sell your fund in case of defaults or non-payment of loan. The limit of the loan amount is typically up to 50 to 60% of the net asset value of the mutual fund units pledged in case of equity.

Why loans against mutual funds are better than personal loans:

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1. Low interest rates:

The loan against mutual funds are backed by a collateral or a security and hence has a lower interest rate as compared to personal loans. ''Personal loans are given on the basis of income, while loans against securities are given as per percentage on NAV of your funds. Personal loans are typically way higher (15 to 20%) on interest rates as compared to loans against mutual funds (10 to 12%),'' explained Solanki.

2. Quick liquid capital:

Mutual funds can fetch you fast capital in case of a requirement. It carries a value and bank can give you a definate amount against your securities. Hence, it is a good option to invest your money in mutual funds as it not only acts as an investment but can generate you some liquid when required.

3. Investment remains intact:

The most viable benefit of loans against mutual fund is that your investments remain intact. Your SIP or further addition keeps adding uo to your mutual fund value, in case NAV of your holdings increase, you could ask your bank to readjust the interest rates or repay the partial loan amount.

The personal loans are way easier to process and this is why most of the people run behind it. But it is always better to have a loan against a security due to lower interest rates, secured backup and alive investment.

However, pledging mutual funds or securities should be the last option, because mutual funds are subject to market risks. For example if you have taken a loan of Rs 1 lakh against a mutual fund corpus of Rs 2 lakh. In case the market goes down on correction, the value of your mutual fund corpus dips to Rs 1.6 lakh, the bank may ask you to deposit or pay Rs 20,000 to level for the gap or it can sell your mutual fund holding.

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