Benefits of Taking a Loan Against Your Shares and Mutual Funds

If you have a strong investment portfolio and are in need of instant funds, you can use your Mutual Funds and shares as collateral to secure a loan. Applying for a loan against Mutual Funds is highly recommended because it lets you borrow instant funds by keeping your funds and shares as security without selling them off. Read this article to learn about the major benefits of taking a Loan Against Shares and Mutual Funds. 

Why Take a Loan Against Your Shares and Mutual Funds?

These loans are a fast and flexible way to access funds by using your shares as collateral, while still retaining ownership. Here are the benefits of these loans:

Lower Interest Rates 

A major advantage of obtaining a Loan Against Shares is the low interest rate. It offers low interest rates when compared to unsecured loans or Credit Cards. Since these loans function as an overdraft facility based on the value of your pledged shares, you can borrow up to a specified limit. You pay interest only on the amount used and for the duration it is utilised, so they have relatively low interest rates.

High Loan-To-Value ratio

These loans offer a high Loan-To-Value ratio, which gives you access to a greater value of your Mutual Funds and Shares. Leading banks like ICICI Bank offer up to 50% of the net asset value as a loan limit against Equity Mutual Funds and up to 80% for Debt Mutual Funds, offering higher borrowing potential depending on the type of Mutual Funds you pledge.

No Need to Sell Your Investments

The best part about taking a Loan Against Mutual Funds or shares is that you can get access to cash without selling your investments outright. Your Mutual Fund units and shares keep earning returns for you. You can still receive dividends and see an increase in the value of your assets while they are pledged as security for the loan. Moreover, you can utilise the dividends or the appreciation in value to settle the loan or reinvest the earnings.

Fast and Simple Handling

Getting a loan using your shares or Mutual Funds is fast and easy because you get the loan as an approved credit limit from the bank with minimal paperwork. The overdraft facility is activated after you pledge your shares or Mutual Fund units. You can withdraw funds instantly, subject to eligibility and the allowed limit of the overdraft, making it an ideal choice for those in need of emergency financial assistance. 

Low Impact on Credit Score

While basic credit checks are conducted to assess repayment behavior and past loan history, a Loan Against Shares and Mutual Funds does not heavily rely on credit checks. You can secure a Loan Against Mutual Funds or shares, even with a lower credit score, if you have adequate investments to pledge. Furthermore, when your stocks or investment funds are used as security, the impact on your credit score is reduced. By making payments on time, you can maintain your credit score without any effects, making this loan option a low-risk choice for individuals who want to maintain or enhance their credit standing. 

Access to High Loan Amounts

The amount you can borrow is determined by the value of the stocks or Mutual Funds you offer as collateral to the lender. Lenders permit borrowing up to 50% to 80% of the market value of your securities. If your investments have shown growth in value, you might qualify for a higher loan. For example, if the total worth of your funds or stocks amounts to ₹ 10 lakh, you may qualify for a loan up to ₹ 8 lakh depending on the value and type of security pledged, which could be greatly beneficial in addressing higher expenses such as starting a business, handling medical emergencies, or refurbishing your home. 

No Proof of Income Needed

As your investments secure the loan, you may not be obligated to provide extensive documents for proof of income. However, in some cases, banks may request income documents based on their assessment. This increases the loan's accessibility to self-employed individuals, retired individuals, and those without an income source. 

Flexible Repayment Options

Another significant benefit is the flexibility in repayment options when obtaining a Loan Against Shares and Mutual Funds. You can customise the repayment plan as per your financial standing and budget. It means you are required to pay only the interest on the due date, while the principal repayment can be made at your convenience or when you have surplus funds.

Preserving Long-Term Financial Goals

Opting for a loan against shares or Mutual Funds allows you to hold onto ownership rights and enables your investment portfolio to keep increasing in value as time goes by. This strategy helps you stay focused on achieving your term objectives such as planning for retirement or accumulating wealth, while also meeting short term cash flow needs. 

Conclusion 

Taking out a loan using funds or shares is a financial strategy that enables you to access the value of your investments without having to liquidate them outright. It offers advantages such as affordable interest rates and flexible repayment terms while allowing your investments to keep growing uninterrupted and providing access to funds when needed.