When considering financial options, a Loan Against Mutual Funds (LAMF) can be a practical choice for accessing funds without liquidating your investments. However, several myths about LAMFs can cloud one’s judgment and prevent one from taking full advantage of it. In this article, we will try to debunk common myths about Loans Against Mutual Funds, using real-life examples to illustrate the truth. We’ll also address frequently asked questions to clarify any lingering doubts.
Myth 1: “Loan Against Mutual Funds is Risky and Not Worth It”
Reality: Loan against mutual funds (LAMF) is a secured lending where your investments in mutual funds are kept as collateral. Given the nature of the loan, it is inherently less risky compared to personal loans, credit cards or other high-cost loans. If you have investments and redeeming it to raise money, then the opportunity lost and capital gains taxations makes it a losing proposition for the investor. LAMF provides a formidable alternative tao redemption. Like any other loans, discipline is the key. We suggest investors not to redeem so that they don’t miss out on wealth creation and use the LAMF facility instead.
Example: We have helped a number of clients to stay invested by providing liquidity to them. You may visit our website www.neoble.in to explore this alternative.
Myth 2: “You Lose Your Investment if You Default”
Reality: Defaulting on a Loan Against Mutual Funds means the lender has the right to liquidate the pledged mutual funds to recover the outstanding amount. However, this doesn’t mean you automatically lose all your investments. Unlike other loans, where EMI has to be paid, there are no EMIs as the LAMF works as an overdraft facility. Since we do not know what amount you are going to utilize, we cannot fix an EMI. You will be charged interest only on the amount you have used once in a month. Only if you fail to repay interest, an equivalent amount of investments would be redeemed to recover interest. Repeated failure will result in cancellation of loan and only in this case, revocation of securities will be done should you not clear the outstanding dues. Again, any excess recovery will be refunded to your bank account.
Example: If Aarti has mutual funds worth ₹6,00,000 and defaults on a loan of ₹1,50,000, the lender may only liquidate ₹1,50,000 worth of her mutual funds. If her mutual funds are still worth ₹4,50,000 after the liquidation, she will retain this portion of her investment.
Myth 3: “Loan Against Mutual Funds is Expensive”
Reality: Loans Against Mutual Funds generally offer lower interest rates compared to unsecured loans, such as personal loans. This is because the loan is secured against your investments, reducing the lender’s risk. While the interest rate may vary, it is often more affordable than other credit options. The best part is when you consider the opportunity lost and taxes on such redemptions, you will find the interest rate much lower than the stated 10.5% pa.
Example: Suppose Neha takes a Loan Against Mutual Funds at a 10.5% interest rate. If she had opted for a personal loan with an 18% interest rate for the same amount, the cost of borrowing would have been significantly higher. The LAMF is often a more economical choice.
Myth 4: “You Can’t Use a Loan Against Mutual Funds for Personal Expenses”
Reality: You can use the loan amount for a variety of purposes, including personal expenses, medical emergencies, or business needs. There are generally no restrictions on how you use the borrowed funds, making LAMF a flexible financing option, besides being quick and simple.
Example: Ravi needs funds for his child’s education and chooses to take a loan against his mutual funds. He uses the loan amount to cover tuition fees and other education-related expenses, demonstrating the versatility of this financial tool.
Myth 5: “The Process is Complicated and Time-Consuming”
Reality: While taking a Loan Against Mutual Funds involves some documentation and verification, the process is generally straightforward and faster compared to other secured loans. Many lenders offer a streamlined process with minimal paperwork and quick disbursal of funds. At Neoble, we provide the facility in 4 hours during the weekdays.
Example: Simran applied for a Loan Against Mutual Funds and received the funds within 4 hours on the same day. The process included verifying her mutual fund holdings and completing a few forms, but it was completed efficiently, demonstrating the simplicity of the procedure.
For More Clarity Please Read Our – What are the various types of loans against securities?
Frequently Asked Questions (FAQs)
1. Can I take a Loan Against Mutual Funds if I have multiple mutual fund investments?
Yes, you can take a loan against multiple mutual fund investments. The total loan amount will be based on the combined value of all your pledged mutual funds. Schemes which cannot be redeemed are not considered for LAMF and are excluded for loan eligibility.
2. What happens if the value of my mutual funds decreases significantly after I take the loan?
If the value of your mutual funds decreases significantly, we will ask you to either repay the excess loan amount or put additional securities as pledge. In both cases, the intent is to bring down the loan-to-value ratio back to normal. From our end, we provide you a daily update on your loan value, pledged portfolio value and loan-to-value. With this you are always on top of your investments and loans.
3. Is there a limit on how much I can borrow against my mutual funds?
Typically, lenders allow you to borrow up to 50-70% of the value of your mutual funds. The exact limit may vary depending on the lender’s policies and the type of mutual funds you hold. We, at Neoble, add another 5% cushion to help you avoid frequent margin calls in case market value of the portfolio falls.
4. Are there any tax benefits associated with taking a Loan Against Mutual Funds?
No, there are no direct tax benefits associated with a Loan Against Mutual Funds. The interest paid on this loan is not eligible for tax deductions under Indian tax laws (this is for individuals).
5. How does a Loan Against Mutual Funds compare to other secured loans, such as loans against property?
A Loan Against Mutual Funds usually has a lower interest rate compared to unsecured loans but may be slightly higher than loans against property. Loans against property typically offer lower interest rates but involve more extensive documentation and a longer approval process.
6. Can I prepay my Loan Against Mutual Funds without any penalties?
Prepayment terms vary by lender. Some lenders may allow prepayment without penalties, while others might charge a fee. It’s important to check the prepayment terms before finalizing the loan agreement. With Neoble, you will never face prepayment penalties or foreclosure charges.
Conclusion
Understanding the facts behind Loans Against Mutual Funds can help you make more informed financial decisions. While there are myths surrounding LAMFs, the reality often reveals that these loans can be a practical and cost-effective option if managed correctly. By debunking common myths and addressing key questions, you can better evaluate whether a Loan Against Mutual Funds aligns with your financial needs and goals.
Feel free to share your thoughts or ask additional questions in the comments below. An informed approach to financial products can pave the way for smarter borrowing and better financial management.
Stay Invested!