People are increasingly becoming aware of portfolio diversification; nowadays, investors do not limit their portfolios to stocks investments but they also allocate their funds to various investment options such as mutual funds, real estate, gold, and even debt instruments. When faced with a financial need, they usually liquidate their investments. But that’s not the only option. Now one can also avail loans against these assets instead of liquidating such investments.
Suppose an individual has investments in properties and mutual funds (MF). They can avail of loans against both, from their preferred lender. This blog will provide readers with important details regarding loans against mutual fund as well as loans against property and differences between both.
Loan against mutual funds
When an individual applies for a credit facility by pledging their mutual fund units, it is referred to as a loan against mutual funds. The applicant uses his/her mutual fund investments as collateral to seek a desired loan amount. While an investor will continue to earn capital gains and dividends from the pledged units, he/she cannot sell them off till all loan availed is paid off and due pledge is release by lender.
To pledge mutual fund units as collateral, potential borrowers must approach their mutual fund registrar and request for lien marking such mutual fund units in favour of lender. If the borrower fails to repay the loan, the lender has the right to enforce the lien. In case of default, the Lender will ask the Asset Management Company(AMC) through Registered Transfer Agent (RTA) to sell off the units lien marked and recover the loan amount.
Loan against property
When eligible borrowers mortgage their commercial or residential property as collateral and avail of a loan, it is known as a loan against property. Generally, in India, people make use of this credit facility to finance large expenses such as business expansion, home renovation, destination weddings, children’s higher education, etc.
People who have been considering this financing option must note that if they are unable to repay the loan, the lender will enforce its mortgaged created over the property to recover the loan outstanding.
Many financial institutions provide pre-approved offers for home loans, loans against property, etc. With these offers, lenders can quickly approve applications of eligible candidates. One can check his/her eligibility on the respective lender's official web portal by entering some basic information.
Loan against Mutual funds vs loan against property
It is important to take note of details as mentioned hereinafter, when it comes to differences between loans against mutual funds and loans against property:
1. Difference in Mortgage
Both loans fall under the category of secured loans. But the collateral that borrowers can put up is different. People need to mortgage their immovable properties (residential or commercial) to avail a loan against property whereas to get a loan against mutual funds, people need to pledge their mutual fund units.
2. Difference in tenure
Financial institutions generally offer a longer tenure for loans against property. People can get the benefit of a flexible tenure for up to 15 years from certain lenders which may vary on case to case basis..
When it comes to loans against mutual funds, the tenure will depend upon the required loan amount and the mutual funds pledged against such loan. Certain lenders might offer tenure as low as 12 months which one can extend later by paying extra charges.
3. Differences in interest rates
It is important to note the difference in interest rates between the two credit facilities. Many lenders might offer a pre-assigned loan limit of up to 50% of the value of the mutual funds. But, in such situations, borrowers would have to pay interest only on the utilised loan amount.
People can avail of a Bajaj Finance loan against property at attractive interest rates ranging from 8% to 14% per annum. The interest rate will vary depending on the lender.
4. Difference in documentation
The documentation process of a loan against mutual funds is easier when compared to loan against property. One needs to provide the pledge agreement, lien confirmation letter, latest report of the mutual funds, and KYC documents while applying for loan against mutual funds.
However, when one applies for a loan against property, they should keep ready at hand all the property-related documents including non-encumbrance certificates, utility bills, property tax receipts and receipt of latest maintenance.
Reasons to choose a secured loan
It is natural for people to wonder which financing option to opt for. One must check the details and eligibility criteria with respect to loan against mutual fund and a loan against property. After analyzing their financial goals one can then take an informed decision.
The financial requirement will differ from person to person. But there are important benefits of opting for secured loans against mutual funds and /or loan against property which are :
- Quick approval of loan applications is an important benefit. It is particularly useful when one needs funds urgently.
- Applicants can negotiate favourable terms and conditions like low-interest rates and flexible repayment tenure.
However, potential borrowers must remember that the lender will have the right to enforce the security created in favour of lender in case of a default in repayment obligations of the borrower . Another important factor is that the fair value of the security should be much more than the loan amount. Depending on the lender, one can get up to 90% of the value of the property as a loan against properties.
One can check pre-approved offers on secured loans offered by various financial institutions , by logging into their official website. It is also important to check the details of loans against mutual funds vs loans against property to make an informed decision.
