You can take loans against your mutual funds; here’s a quick guide

Most of the investors opt for liquidating their investments when they are in dire need of money. Little they know that a loan against investments can be availed.

If you have invested in mutual funds and SIPs, it is advisable to take loans against them than stopping them. By pledging your investment, you stay invested and your needs are also taken care of. If you take a loan, you will get the dividends but won’t be able to redeem your pledged mutual fund.

The process is not cumbersome and many banks and non-banking finance companies (NBFCs) offer loan against mutual fund.

Here’s a quick guide on the process

1. Whom to approach: If you have decided to avail a loan against your mutual fund, you have to approach a bank or NBFC. In case you opt for a bank, the bank will require a lien on the units in its name. You will get a loan against the value of your units. Also, when the units are lien, you cannot sell them.
2. Letter for the lien: Lien is a document that gives the bank ownership of your pledged funds. You will have to ask your mutual fund house for a lien on your units in the favour of the bank.
3. When you repay the loan: Once you repay the loan, the bank can send a letter to the mutual fund house for removal of lien. In case you are unable to repay, the bank can ask the mutual fund house to redeem the units and send the amount to it.
4. Your checklist: Before availing a loan on mutual funds, make sure your mutual fund is eligible for loan and whether the mutual fund scheme is approved by your bank.

Always keep this option open when you are planning to take a personal loan. At times, the interest rate on loan on mutual funds is lesser than that of personal loan.