Availing of a loan against mf (mutual fund) is a great idea to fulfil surprise money requirements. It allows you to utilize your current investment without actually selling it. However, like any loan, it involves risk. Understanding how to manage these risks is extremely crucial. It will allow you to maintain control and remain away from money problems in the future.
Here are some easy steps to handle risk while taking a loan against your mutual fund investment.
Know How Much You Need
Before you apply, consider why you need the money. Do not borrow more than you require. Borrowing extra might seem useful now. But paying back a large amount later can be difficult. Always tie your loan to your actual needs.
Also, verify your fund’s value. You can take a loan for a fraction of your fund’s value. This is typically between 60% to 70%. For instance, if your mutual fund is worth ₹2 lakh, the bank may give you a loan of up to ₹1.4 lakh.
Verify the Interest Rate and Charges
Interest is that you pay to utilize the loan. Some lenders charge less if you have a long association with them. Others can charge more.
Besides interest, see if there are any extra fees. There might be processing fees or penalties for delayed payment. Sum up all such expenses before taking a call. Though it may seem a small figure now, it can sum up.
Select the Proper Type of Loan
You may go for a term loan or an overdraft. In a term loan, you receive the amount in one lump sum. In an overdraft, you receive a limit, and you avail yourself of what you need.
Select what is suitable for your requirements. If you are aware of how much is required, opt for a term loan. If you might require money in instalments, then an overdraft is preferable. Selecting the inappropriate one can result in additional expense.
Pay on Time
Late payments result in penalties. They also damage your credit rating. A low rating makes it difficult to obtain loans in the future. If your loan is not repaid on time, the lender can dispose of your mutual fund units. That will damage your savings.
Set reminders or auto-debit arrangements. They assist you to make timely payments. If you think you will miss a payment, discuss with your lender first. They can assist you with an alternative plan.
Verify Fund Performance
The market value of mutual funds may increase or decrease. If the value decreases too significantly, the lender might request that you repay part of the loan or provide additional funds as security.
Monitor your fund’s value on a monthly basis. If you notice it going down quickly, be prepared. Either pay some portion of the loan or offer other funds as a standby.
Use Reliable Tools
Use an instant loan app to compare loan offers. It is time-saving and provides fast information. But do not choose the first option you get. Compare interest rates and conditions. Select the one that suits your needs and your budget.
