During times of financial need — whether due to unexpected medical emergencies or planned expenditures like home renovations — many individuals either turn to personal loans or credit cards or dip into their investments.
While these methods may provide immediate relief, the long-term perils to your personal finances cannot be overlooked.
Personal loans, for instance, can carry interest rates as high as 25% per annum, depending on the lender and your credit profile.
Meanwhile, excessively relying on credit cards and not paying the total amount due on time can lead to steep annual interest of around 35%-45%.
Missing payments or late payments further attract penalties, not only adding to your debt burden but also negatively impacting your credit score, making future borrowing more difficult and expensive.
Even if you plan to repay the loan early, prepayment charges levied by lenders could erode any interest savings, reducing the overall benefit of early closure.
Liquidating investments might seem like a straightforward solution to avoid high-interest debt. However, doing so becomes a hurdle in your progress towards long-term financial goals.
Moreover, the redemptions can attract taxes and exit loads, eating into your returns.
In such a scenario, a Loan Against Mutual Funds may be a worthwhile alternative to high-interest debts and liquidating investments prematurely.
What Is a Loan Against Mutual Funds?
A Loan Against Mutual Funds is a type of Loan Against Securities that allows you to pledge your mutual fund units to a bank/NBFC as collateral to borrow funds, without needing to sell or liquidate them.
The loan amount you will be eligible to receive will depend on the value of units held in your folio.
Note that while availing loan against the securities, the bank/NBFC marks a lien on the units to the extent of the loan — which means that you cannot sell or redeem the pledged units until the loan is repaid in full.
Opting for a Loan Against Mutual Funds instead of redeeming/liquidating an investment carries the following benefits:
- It does not get in the way of compounding when planning for long-term financial goals.
- Your ongoing SIPs (Systematic Investment Plans) are not interrupted in the process, ensuring continued wealth creation.
» Read More
