We talk about having a goal aligned investment strategy, It is imperative for one to have a loan repayment strategy. Talking about taking a loan against a mutual fund investment, what is that stage in your loan repayment that you might want to go for this? What should be that threshold beyond which if you are likely to go you should touch these mutual fund investments?
Shweta Jain: Mutual funds are for your goals and we have been saying that one should invest with a goal in mind. But yes, what we tend to forget is that humans tend to put today before tomorrow. So, today’s consumption, whether it is a holiday, whether it is some shopping, splurging, takes priority over, say, your own retirement in the future. So, when you are talking about mutual funds and you have started investing and built these wonderful habits for the future, it does not really help that you are going to liquidate these for a holiday when you had started saving for retirement. You could make losses, you could get off track in a lot of these things. These can be as an alternative to, say, taking credit card loans or personal loans. If you build a decent portfolio, usually the minimum amount of loan that you can take is Rs 50,000. But there are some portals and websites that also give you less than Rs 50,000, as low as Rs 25,000. But one has to remember that it cannot be the value of your portfolio. So, against equity mutual funds, for example, you could get only between 40% and 50% of the value.
If your portfolio lacks equity, you can get a loan of up to, say, Rs 50,000. On the other side, if it is a debt based mutual fund or part of the portfolio which is debt based, you could get as high as 80% and some providers even promise up to 90% of the value as a loan. So, it is quite interesting that you do not have to withdraw. You get a better rate of interest than credit cards and personal loans. So, that is one of the reasons why this could be a better option than the others.Talking about the rate of interest and also talking about the repayment that you might want to opt for these mutual funds, is it possible that once you take a loan against a mutual fund you will have to repay it also and what will be the interest rate charged?
Shweta Jain: Usually it is between 9% and 11%, depending on who you are taking the loan from and what is the value of the loan. The repayment strategy is usually that you pay the interest, but you could add on the part of the principal as well. It could be, for example, you only pay the interest for the year as an EMI and pay the principal towards the end of the tenure. The tenure could be anywhere between one to three years.There are some providers that charge a pre-payment penalty. There are a few that do not. So, depending on your flexibility and your need, make sure that you are going with the right provider and ideally there should not be any prepayment charges. I would also want to add here that there are a lot of other types of charges that could be added and they could be a small percentage or look as a small percentage, but could add up to quite a bit of an amount.
For example, the pre-payment clauses could be there. Processing charges could be there. Reviewing charges or all of these. I have seen in some portals as many as six or seven different kinds of charges which add up to 12-15% of the amount. So, while the interest rate looks lower, if there are too many penalties or too many charges, make sure you stay away from them.
Any specific tenure till when you can get the loan?
Shweta Jain: So, usually between one and three years. So, some of them are so popular that they take only one year. Some of them give the flexibility up to three years.
So, where do you actually go? Do you approach the fund houses or do you go to a bank? What is the procedure? What is the protocol like?
Shweta Jain: You could approach banks, you could approach NBFCs, even the new-age mutual fund distributors, be it Zerodha, be it smallcase – also provide a loan against mutual funds and it is quite easy actually. Usually a day or two is the amount of time that they take. Banks may have a little more tedious process like signing of documents and stamp paper, etc. But the online ones are quite quick and some of them even promise to disburse the loan within 4 hours to 24 hours and most of them are terms and conditions that you just go and click yes, agreed to. I would definitely urge that investors before taking these loans, read some of the fine print as well, so they are aware of what they are signing for.Is there any specific type of schemes in equity and debt are we talking about or you can just go and present your entire portfolio and then it is up to the NBFCs or banks to decide as to what should be counted in and what not?
Shweta Jain: Yes, so that is very interesting because a lot of these banks or NBFCs, have their list of schemes that they have approved for this and there are some banks that would take only a particular fund house or a list of fund houses and they would only lend against them. Others, irrespective of how much you have invested, may not be ready to do that. That is another thing people should look at before opting for the loans from the right providers.
Any specific age limit to take that loan or can even a 60 plus individual who has an equity portfolio opt for these kinds of loans against mutual funds?
Shweta Jain: Usually there is no age limit as such, but ideally you do not want to do that when you are post 60.
Any do’s and don’ts that you might want to recommend to our viewers?
Shweta Jain: Yes, do not take the loan unless it is absolutely necessary. Do not take this just for splurging on something offhand. Take this as an option against your credit card loan because those work out quite expensive. Do take these as an option against personal loans. And, of course, pay as soon as possible. Choose providers which are perfect for you, which suit your requirements and where you are comfortable with their conditions.
