Can you get bank loan against your mutual fund units?

You need not upset your long term plans in case of a short term emergency requirement of funds. You can avail loan against your mutual fund investments. Amit Trivedi writes in Mid-day Gujarati edition today:

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The English translation is as under:

Most of the good quality investment advisors would advice an investor to focus on the long-term goals and not worry about short-term market movements. Incidentally, many of us have some goals to fund far in the future. For the purpose of the investment to deliver in line with expectations, the investment should be given time.

Now, two things are required for someone to hold onto the investments for long periods without worrying about short-term performance: (1) financial ability, and (2) psychological ability. We will not talk about the psychological ability here. However, the financial ability to stay invested can partly take care of the psychological ability.

The advisors and financial planners strongly recommend taking care of the short-term requirements through creation of a contingency fund. They also strongly recommend buying enough insurance cover that takes care of your family’s expenses in case an unfortunate event takes place.

Even after that, some emergencies may crop up – something unexpected and sudden. It could be a business loss or money required by a close friend or a family member. What happens when you have invested your money for meeting long-term goals, but there is an emergency requirement for a short while?

Well, this is where one may consider a facility offered by banks – loans against security. Banks allow one to borrow against various investments for a short period. This is an overdraft facility, where there are no EMIs to be paid and one may pay the entire sum (or part of it) back to the bank as per one’s convenience. The interest is charged only to the extent of amount borrowed (or outstanding, if part of the loan is repaid) and only for the period for which the same is borrowed. You may get a limit sanctioned from the bank, but use only what is required.

Mutual fund units are approved securities to borrow against, under this scheme. Banks lend money against the collateral of MF units. The process is simple: one needs to get the units pledged in favour of the bank. This can be done through filling up some forms and getting confirmation from the respective mutual fund companies. Debt and equity funds may be treated differently. You may check with your bank.

The benefit of such a facility is: you are able to tide over the temporary cash crunch without selling your long-term holdings. the cost of such a loan is also low as it is limited to the period of borrowing and to the extent of the amount used.

We have often seen that the cash crunch and market crash come together. In such a situation, if one has to liquidate the holdings (especially the equity funds), one may not get a chance to participate in the upside that follows. Consider this facility available from banks.

At the same time, please be careful. This is a type of loan; hence use your discretion. Do not make a habit of borrowing or using this limit for trivial reasons. Use it only when it is absolutely necessary and you have run out of other options.

Wish you all a very happy, healthy and wealthy 2016.

-        Amit Trivedi

The author runs Karmayog Knowledge Academy. Recently, Amit has authored a book titled “Riding the Roller Coaster – Lessons from Financial Market Cycles We Repeatedly Forget”. The views expressed are his personal opinions.