Loan against Mutual Funds & shares
"Loan against Mutual Funds and shares" is a financial instrument that allows investors to leverage their existing investment holdings to secure a loan from a financial institution, typically a bank or a non-banking financial company (NBFC). This facility provides investors with a convenient way to access funds without having to liquidate their investments, thereby avoiding potential capital gains tax implications and retaining exposure to potential market gains.
Collateral: Investors pledge their Mutual Fund units or shares as collateral for the loan. The loan amount is determined based on the value of the securities being used as collateral.
Interest Rates: The interest rates on such loans are typically competitive, making them an attractive financing option compared to personal loans or credit cards. The interest rate may vary depending on the lender, the type of securities pledged, and the loan amount.
Loan to Value (LTV) Ratio: Lenders establish an LTV ratio, which dictates how much of the investment’s value can be borrowed. LTV ratios are generally lower for equities compared to Mutual Funds, as stocks tend to be more volatile.
Tenure: Loan tenures can vary but are typically short to medium-term, ranging from a few months to a few years. The investor needs to repay the loan within the agreed-upon tenure, failing which the lender may liquidate the collateral.
Flexible Usage: Borrowers can use the loan amount for various purposes, such as meeting personal financial goals, funding business requirements, or managing unexpected expenses.
Risk: While loans against Mutual Funds and shares offer liquidity without selling investments, they do come with a certain level of risk. If the market value of the collateral falls significantly, the lender may issue a margin call or liquidate part of the collateral to cover the outstanding loan amount.
Tax Implications: Borrowers should be aware of any tax implications associated with these loans, such as capital gains tax on Mutual Funds or shares if the collateral is sold to repay the loan.
Documentation: The process for obtaining such loans involves documentation and approval from the lender, which may include a formal loan application, KYC compliance, and the creation of a collateral account.
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