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Pros and Cons of Loan Based on Mutual Funds

Personal finance has garnered enough attention in recent years that it is a space that’s adequate to fit new Indian startups and new finance-related concepts.

The concept of loans based on mutual funds has made it easier for investors to draw a loan without even liquidating their portfolio.

But how wise of a decision is it to draw a loan against your mutual fund portfolio?

Do the pros outweigh the cons?

And is it a wise financial decision in the first place?

We’ll answer all these questions in this blog post.

Let’s get started.

How does a loan against mutual funds work?

Here’s a step-by-step breakdown of how a loan against mutual funds works:

Eligibility Criteria:

The first step is to check with the lender about your eligibility. If your portfolio is eligible, you can borrow a loan. At 50Fin, a mutual fund portfolio with a minimum balance of Rs 50,000 is required.

 

Pledging mutual fund units:

Before you borrow a loan, you pledge a certain number of mutual fund units with your lender. This involves marking those units as collateral security against the loan. The units usually remain in the investor’s demat account.

 

Loan approval and disbursement: 

After a (usual) digital documentation, the loan is processed and the amount is disbursed to your bank account. The disbursal is typically quick compared to traditional loans, making LAMF an attractive option for those in need of immediate funds.

Pros of Loan Based on Mutual Funds

Loans on mutual funds already have plenty of lure to it. 

However, some of the most attractive features of loans based on mutual funds are:

1. Liquidity without Liquidation

One of the primary advantages of taking a loan against mutual funds is the ability to utilize your investments’ liquidity without having to sell them. 

When you borrow a loan against your mutual fund units, you aren’t necessarily selling your investments. Rather, you’re using them as collateral.

This can be especially beneficial during emergencies or when you need funds for short-term needs without disrupting your long-term investment goals.

2. Lower Interest Rates

Traditional loans and personal credit come with their own huge interest-rate liabilities, something that loans on mutual funds aren’t limited by.

As mutual funds act as collateral, lenders often offer you more favourable terms on your loans.

Even at 50Fin, we offer an interest rate of just 10.5% p.a.

3. Earn Continuous Returns

Despite drawing a loan against your mutual fund portfolio, you still own them.

This means you can continue earning returns on them even when you’ve used them as collateral.

This is a unique attraction of this type of loan. You continue earning returns during the loan period as well. This can be advantageous if you believe in the long-term growth potential of your mutual funds and wish to avoid realizing capital gains or losses prematurely.

4. Quicker than other types of loans

Traditional loans involve extensive documentation and processing time. Hence, a lot of time.

Your mutual funds loans are completely different.

But why?

The thing is that mutual fund loans use your portfolio as collateral. All the information is already attached to your online account.

Documentation in such cases is easy and takes just 7 minutes with 50Fin.

Cons of Loans Based on Mutual Funds

Just like everything, loans against mutual funds also have their cons. 

Here are the cons you should know about.

1. Risk of Margin Calls

During your loan tenure, it’s possible for your portfolio to lose value according to market fluctuations.

If that happens, your lender may issue margin calls requiring you to either repay part of the loan or pledge additional assets. 

Failure to meet margin calls can lead to the liquidation of your mutual funds, potentially resulting in losses.

2. Limited Loan-to-Value Ratio

Lenders typically offer loans against mutual funds at a certain loan-to-value (LTV) ratio, which may be lower than the actual market value of your investments. 

This means you may not be able to borrow the full value of your mutual funds, limiting your access to funds.

Tips for Using Loans Based on Mutual Funds Wisely

  1. Evaluate Your Financial Needs: Before you even apply for a loan on your mutual fund portfolio, assess whether you need it in the first place or not. Ensure that borrowing against your investments aligns with your short-term goals and does not compromise your long-term financial plans.

 

  1. Understand Loan Terms: Familiarize yourself with the terms and conditions of the loan, including interest rates, repayment schedule, and potential penalties. Clarify any doubts with the lender to avoid misunderstandings later.

 

  1. Monitor Market Conditions: Keep a close eye on the performance of your mutual funds and the overall market conditions. Be prepared for potential fluctuations in the value of your investments and have a plan in place to handle margin calls if they arise.

Borrow Loan Based on Mutual Funds With 50Fin

It’s a no-brainer that a loan based on mutual funds is a better option than any traditional investment.

Most importantly, the convenience and ease it offers is also something to look forward to.

And one of the easiest ways to borrow a loan against mutual funds is to sign up at 50Fin.

With no minimum CIBIL score required, 7-minute approval time, and completely digital documentation, it’s a no-brainer to sign up on 50Fin and borrow a loan against your mutual funds.

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