The loans also need to be checked from the perspective of the cost that will have to be paid.
Usually, loans that are secured in nature and have the backing of some asset have a lower interest rate compared with others that are unsecured. One issue that is often ignored is that of loans against mutual fund units. Here is a look at the features of these loans:
Nature: As the name suggests, this is a loan offering that is available to borrowers against the mutual fund units that they hold in their name. The loan can be available against any type of the mutual funds that are present in the portfolio, therefore, there is no restriction on this front, although, some of the features for a loan against various types of mutual funds could be different.
This difference will have to be taken into consideration when the actual transaction is being completed. The way in which this works is that the investor gives the mutual fund units as security and the lender provides a loan against it. The loan is then repaid over the specified period that is mentioned in the agreement. If the investor is not able to repay the loan, then the lender will sell the mutual fund units to get back the money.
Choice: A person has choices as far as lenders are concerned when these types of loans are compared because they are offered both by banks as well as the non-banking financial institutions (NBFCs). This implies that there is no restriction in terms of the place from where the loan is taken.
A procedural aspect of the loan is that when there are joint holdings in the mutual fund, then, the permission of all the unit holders is required for loan.
Rates: The good news for borrowers when it comes to loans against mutual fund units are concerned is that these loans are available at a rate that is lower than what they will get for unsecured loans.
The presence of the mutual fund units acts as a means of security that helps in bringing down the rates as compared with an unsecured loan.
The other thing is that the mutual fund will take a lien on the units so they cannot be sold by the individual investor once he invests in the mutual fund.
However, there are other factors, such as receiving dividends that can continue normally, so this is something that the individual borrower should know when he avails a loan Percentage: The key element of the entire loan is the amount that will actually be sanctioned because there has to be an adequate margin present. The amount of the loan actually depends upon the nature of the mutual fund holding.
If it is a debt fund, then, the percentage of the loan compared with the fund value will actually be higher, but, there will always be some amount of margin that is actually maintained by the lender.
On the other hand, when it is an equity-oriented fund, then the amount of the margin will be higher with the end result that the discount could be very high and could go up to 4050 per cent of the value of the units.
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