Hypothecation of mutual funds allows investors to use their investments as collateral to obtain a loan with or without an official loan document. It provides an alternative to personal loans and Instant App Loan India. Now, is it beneficial? Here are the pros and cons for deeper consideration.
Pros of Taking a Loan Against Mutual Funds
- Low Cost of Interest: As loans taken against MFs are secured loans, the interest rate at which they are charged is much lower than that on unsecured personal loans or debt from credit cards. This is because the collateral to the investment reduces the risk involved in lending.
- Continuity of Investment: Pledge your MFs, and you still own them. Investments can continue to grow during that time, possibly offsetting the cost of interest on the borrowed amount.
- Flexible Repayment Terms: Most lenders are flexible on the repayment schedule for loans against MFs. You can select the months to pay off the debt according to your pocket, making it even more manageable.
- Fast Processing: Loan processing for MFs is relatively faster, particularly with digitalisation. So it can avail itself of a timely fund jump when needed.
- Does Not Include Credit Score: Since the loan is secured against your mutual funds, lenders do not bother about your credit score, which is good for people with a not-so-good credit history.
Checkpoints for Loan Against Mutual Funds
Market trends, such as market risk, loan amount limit, lock on fund transactions, and risk of liquidation, are some checks that need to be considered before considering a loan against MF.
Comparison with Instant App-Based Loans in India
Instant app-based loans in India provide instant unsecured loans through a digital channel. It compares favourably with loans against MFs in many ways:
- Interest Rate: Instant loans tend to bear very high interest rates, in stark contrast to loans against MFs, which makes them much cheaper than instant loans.
- Approval Process: Instant loans are totally dependent on an individual’s credit score, and eligibility criteria are quite tough; on the contrary, loans against mutual funds are secured, thus making these loans easier for those having low credit scores.
- Loan Amount and Tenure: Instant loans may be smaller or have shorter repayment periods, whereas a loan against mutual funds can avail larger amounts at tenure flexibility as per the value of the pledged funds.
Final Words
Taking a loan against MFs is an individual decision based on financial position:
- Ideal Cases: If money is needed but investments should not be redeemed, this is the right borrowing. The cash requirement is fulfilled by keeping the investment intact in active growth.
- Cautionary notes: Market conditions must be monitored. A significant depreciation in the value of mutual funds would entail margin calls or require additional collateral. In that case, there had to be an unambiguously drawn repayment plan to preclude liquidation risk.
Borrowing against mutual funds should be a wise thing to do for someone who requires funds and does not wish to interfere with his investment portfolio. Assessing risk and then regarding it against financial objectives and tolerance is a must.