How an instant loan against mutual funds works: Benefits and risks explained

Mutual funds are a great way to start investing and understand how the market works while not taking many risky investments. However, mutual funds are not just an investment for the future but can in fact help you in securing instant loans during emergencies.

What is an instant loan against mutual funds?

Instant loan on mutual funds is a way to avail a loan instantly by providing mutual fund units as collateral. These instant loans are provided by NBFCs as well as various banks. The amount of loan usually depends on the market value of your mutual funds portfolio.

Advantages

Fast processing:With minimum documentation and digital pledging, these loans are approved faster and disbursed quickly.

Loan amount: The loan amount is based on your mutual fund type, with equity funds offering lower limits and debt funds providing higher limits.

Ownership retention: Even after providing the funds as collateral, you can continue to own the pledged units and receive dividends or interests.

Flexible tenure:You can easily choose a repayment tenure for your loan as per your convenience and affordability.

Lower interest Rates:The interest rates are comparatively lower than those of the unsecured personal loans because of the collaterals provided.

Versatile Use:The instant loan can be borrowed for any personal expenses.

Disadvantages

Market volatility:The mutual funds are volatile. Hence, market value may change with time which may affect the loan to value ratio.

Liquidation risk: In case of loan default, you will lose possession of the funds and the lender may liquidate them to recover the loan amount.

Limited loan amount:If you are in need of a high loan amount, you may not be able to get the desired loan amount especially in case you are providing equity funds as collateral.

Should you apply for an instant loan against mutual funds?

Applying for an instant loan against mutual funds is a smart way to borrow funds. However, you must understand that if you fail to repay the loan in time, you will not be able to get your funds back.

The facility of quick loan disbursement, lower interest rates and flexible repayment tenures makes it a favourable option if you plan your repayment journey wisely. If you are not willing to take risks and are in need of higher loan amounts, then you may consider other options available in the market.

Conclusion

Although these loans attract lower interest rates as compared to unsecured loans, you must ensure that you first analyse your need and decide whether or not you can afford the loan. It is important that you stay ahead of your repayments as even a single default can lower your credit score which will make it difficult for you to take loans at low interest rates in the future. Hence, make wise decisions to avoid any unnecessary financial burdens.

(Note: Raising a loan comes with its own risks. So, due caution is advised)