Now, you can get a loan against your mutual fund. Good idea or bad?

Are you in need of urgent money? You can now take out a loan against your mutual fund investment.

This facility - known as loan against securities - allows investors to get instant loans at a 9-11 per cent interest rate by keeping their equity/debt mutual fund or stock investment as collateral. Only tax-saving fund holders are not permitted to avail of this feature.

How much loan you can get
Anything between Rs 10,000 and Rs 3 crore.

How does it work

• For equity mutual funds (barring tax-saving funds), the loan-to-value (LTV) is 45-50 per cent. So, if an investor has an equity fund of Rs 2 lakh and wants to pledge their entire holdings, he can get a total loan of up to Rs 90,000.
  
• Debt mutual fund investors can get a loan of up to 80 per cent of their total investment.
  
• Loans can also be disbursed against your stock investment. You can get a 30-45 per cent loan on your total investment. For instance, the loan-to-value is 45 per cent if you hold stocks of the top 100 companies listed on the Nifty, and for the next 100 company stocks, it is 40 per cent. The minimum loan-to-value is 30 per cent.

Our take
Loan against mutual fund (LAMF) can be a tactical use for very short-term needs, say 2-3 months. We stress on the word 'needs' because it should truly be genuine. Nobody should use this money to speculate or trade in the market.

This facility can also be a better option than exiting your mutual fund investment due to the following reasons:

• Tax benefits: If an equity mutual fund holder exits their investment within the first 12 months, they'd need to pay a 15 per cent tax on the profit. By not withdrawing your mutual fund hastily, you can save paying a high percentage of tax.
  
• Avoiding exit load: Closed-end mutual funds usually charge a fee of 1-2 per cent at the time of withdrawing your investment. Even though such mutual funds are few and far between, it is better to check your mutual fund investment before you decide to pull the plug on your investment.
  
• No disruption in long-term plans: Time is the most important factor in investing, thanks to the power of compounding. So, if you withdraw your mutual fund investment to meet a short-term need, you are actually doing a disservice to yourself.

To give you a glimpse of how time and compounding can turbocharge your investments, here's what you should know: If an investment grows at 10 per cent a year, your money would more than double in the first ten years, about six times in the next ten and nearly 16 times in further ten years!

Sounds unbelievable, but it's true. By not withdrawing your mutual fund investment, you are actually helping your money grow in the long run.

You would choose long-term gain over short-term pain.

How to get loan against securities
While different companies may have different processes, we take Mirae Asset Financial Services' example to help you navigate the loan-taking process.

• Download the Mirae Asset Financial Services app
  
• Complete your KYC registration by providing PAN and Aadhaar details
  
• Enter bank account details
  
• Pledge mutual funds or shares as collateral
  
• Verify bank account online via e-mandate
  
• Read and sign loan agreement online via OTP

Things to remember

• Interest will be charged on the amount used by you, not the entire loan amount.
  
• The interest amount will be directly debited from your bank account.
  
• In the case of Mirae Asset Financial Services, there is a processing fee of Rs 999 plus GST. That comes to Rs 1,179.
  
• You also need to pay a one-time stamp duty of Rs 500 when signing the agreement.
  
• If the loan feature crosses 12 months, you'll need to pay the processing fee of Rs 1,179 again.