A loan against a Systematic Investment Plan (SIP) is an innovative financial product that allows investors to borrow funds by leveraging their SIP investments as collateral. This type of loan provides quick liquidity without the need to liquidate your investments, ensuring that your long-term financial goals remain intact. Understanding how this works can help you make informed decisions and utilize your investments efficiently.
What is a Systematic Investment Plan (SIP)?
A Systematic Investment Plan (SIP) is a disciplined investment strategy that allows individuals to invest a fixed amount regularly in stocks or mutual funds. It helps investors accumulate wealth over time by investing small sums periodically, taking advantage of compounding and rupee cost averaging. SIPs are popular for their flexibility, affordability, and potential for substantial long-term growth.
What is a loan against SIP and how does It work?
A loan against SIP allows investors to pledge their SIP investments as collateral to obtain a loan. This process involves assigning the SIP units to the lender, who evaluates their value and offers a loan based on a percentage of this value, usually around 50-70%. The SIP continues to grow, and investors can repay the loan in flexible terms without disturbing their investment plans.
The loan amount you can avail against your SIP investments is determined by the following factors:
- Net Asset Value (NAV) of the Mutual Funds: The current market value of your mutual fund units is crucial.
- Loan-to-Value (LTV) ratio: Lenders typically offer loans against a certain percentage of the total value of your SIP investments. This percentage, known as the LTV ratio, varies between 50% to 70%, depending on the type of mutual fund and the lender's policies.
- Type of Mutual Fund: Different types of mutual funds have different LTV ratios. For instance, equity mutual funds may have a lower LTV ratio compared to debt mutual funds.
To illustrate, let's say you have SIP investments worth Rs 10 lakhs. If the lender offers a 60% LTV ratio, you can potentially get a loan of up to Rs 6 lakhs.
It's important to note that the final loan amount may also be influenced by factors like your credit score, income stability, and the lender's specific policies.