Reinvesting the Mutual Fund Loan: Important Things to Know

Mutual fund loans allow you to leverage your assets to maximise returns and provide you with a strategic advantage. You can even unlock the potential of your mutual funds by taking a loan against them and then reinvesting those funds to compound your earnings. 

Seasoned investors often use this strategy to access cash to keep riding the market wave while meeting their short-term needs. To know more about this strategy, benefits and risks, read on. 

What is the Loan Against Mutual Fund Procedure?

This lending process can be a game-changer if you are struggling with a temporary financial need but are hesitant to disrupt your long-term investment. Here is the procedure to obtain a mutual fund loan:

• Pledge your mutual fund units to the lender, which the lender will consider as collateral 
• The mutual fund units continue to earn returns while you repay the entire loan
• You cannot sell your MF units until you repay the loan in its entirety 
• Once you repay the loan, the lender will release the pledge or lien marked over your MF units
• If you default on loan repayment, the lender can sell off your mutual funds to recover the borrowed sum

Can I Invest the Loan Amount Received Against MF in Another MF Scheme?

This credit facility generally does not come with any restriction on the purposes of use. Hence, you can also utilise the loan amount to invest in mutual funds. However, there may still be certain restrictions on the type of investments allowed with the loan amount.

Things to Know When Availing Loan Against Mutual Funds

This innovative tool allows you to access quick cash without selling your valuable MF units. But before diving in, consider the following factors.

• Access to Limited Funds

The amount you can get as a loan against mutual funds depends on the type of scheme and the financial institution from which you borrow. Banks generally provide you access to 50%-80% of the Net Asset Value (NAV) for equity mutual funds.

• Not All Banks Provide MF Loans

Many banks and NBFCs lend money only if you have invested in certain mutual funds. Most of them only extend loans against those MFs registered under the Computer Age Management Solutions Private Limited (CAMS).

• Lower Cost

Since these are secured loans, mutual fund loans offer funds at competitive interest rates than personal loans and credit cards. For instance, you will only have to pay an interest rate of 8%-10% p.a., which is considerably lower than unsecured credit.

• Continued Returns on Pledged Funds

You remain invested in mutual funds even after you have pledged them. Also, you will continue to accrue returns as the NAV increases over time.  

• Convenient Online Facility

Due to technological advancements, most banks and NBFCs now allow you to access a loan against mutual funds from the comfort of your home. To apply for the same, all you need to do is visit the lender’s website or mobile application.

• No Credit Check

When you avail of a loan against a mutual fund, which is a secured loan, the lenders don’t conduct an extensive credit check.

Risks Associated with Loan Against Mutual Funds

These offer a tempting solution for accessing quick cash without selling your investments. The following are some of the risks associated with them:

• Market Volatility

As the loan amount depends on the loan-to-value (LTV) ratio, you may have to pledge more units if the NAV of your mutual fund falls. 

• Loss of Returns

If you do not repay the loan, you will lose the capital as well as the returns accrued over time. 

• Risk of Default

If you fail to repay the loan, the lender will redeem the MF units to recover the unpaid amount. 

• Several Charges

Loans against mutual funds come with processing fees, valuation charges and other charges, which can increase your cost of borrowing. 

Now, you may have understood the potential of using mutual fund loans to stay invested if you believe in the bullish nature of the stock market. Fibe can help make it a reality by allowing you to get quick access to funds to invest in mutual funds. With Fibe, you can get hassle-free Instant Loans of up to ₹5 lakhs. Download the Fibe Personal Loan App or register on the application for funds at competitive rates and with easy documentation.

FAQs on Can I Take MF Loan to Reinvest in Mutual Funds

Can I take a loan and put it in a mutual fund?

Yes, you can pledge your investment in an MF to get access to quick funds. You can reinvest this amount in another mutual fund to earn potentially high returns.

Is a loan against mutual funds good?

A mutual fund loan allows you to get quick access to funds while letting you earn returns on your existing investment. These loans also come with attractive interest rates, flexible repayments and quick approvals. If you reinvest the loan amount in another MF scheme, you can earn potentially high returns.