A Comprehensive Guide to Loan Against SIP

Find out how you can borrow funds against your savings plans with a loan against SIP
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Loan Against SIP
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3 mins read
29-November-2024

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 an SIP (Systematic Investment Plan)?

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:

  1. Net Asset Value (NAV) of the Mutual Funds: The current market value of your mutual fund units is crucial.   
  2. 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.   
  3. 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.

Factors influencing loan against SIP

Several factors influence the terms and amount of a loan against SIP:

  • Value of SIP units: The current market value of the SIP investments.
  • Loan-to-value ratio (LTV): The percentage of the SIP value that the lender is willing to offer as a loan.
  • Credit score: The borrower’s credit history and financial stability.
  • Interest rates: Vary depending on the lender's policies and market conditions.
  • Repayment terms: Flexibility in the repayment schedule as offered by the lender.

Advantages of loan against SIP

  • Quick liquidity: Access funds swiftly without selling your investments.
  • Continued growth: SIP investments continue to grow and accrue returns.
  • Lower interest rates: Generally lower than unsecured loans due to the collateral.
  • Flexible repayment: Borrowers can choose repayment terms that suit their financial situation.

Risks associated with loan against SIP

  • Market volatility: If the value of SIP units decreases significantly, it could affect the collateral value.
  • Loan default: Failure to repay the loan can lead to liquidation of the SIP units by the lender.
  • Interest accumulation: Unpaid interest can compound, increasing the overall loan cost.
  • Limited loan amount: The loan amount is restricted to a percentage of the SIP value, which might be insufficient for some needs.

Interest rates and repayment terms

Interest rates on loans against SIPs are generally lower than traditional personal loans. However, they can vary based on factors like:

  • Lender's policy: Different lenders may offer varying interest rates.
  • Credit score: A higher credit score can lead to lower interest rates.
  • Type of Mutual Fund: The type of mutual fund pledged (equity or debt) can influence interest rates.

Common repayment terms:

  • Tenure: repayment tenures typically range from 1 to 5 years.
  • EMI structure: Most lenders offer flexible EMI options to suit your budget.
  • Prepayment: Many lenders allow prepayment of the loan without any additional charges.

It's important to compare offers from different lenders to secure the best interest rate and repayment terms. Additionally, consider the potential tax implications of interest payments on the loan.

Step-by-Step guide to applying for a Loan Against SIP

  1. Check eligibility: Ensure your SIP investments are eligible for a loan.
  2. Select lender: Choose a bank or financial institution that offers loans against SIP.
  3. Application submission: Submit a loan application along with necessary documents.
  4. Evaluation: The lender evaluates the SIP units and determines the loan amount.
  5. Approval and disbursement: Upon approval, the loan amount is disbursed to your account.

Comparison with other loan options

Loan against SIP vs. personal loan

Feature Loan against SIP Personal loan
Collateral required Yes, SIP units No
Interest rates Lower Higher
Loan amount Up to a percentage of SIP value Based on income/credit
Impact on credit score Minimal Yes
Repayment flexibility High Moderate

 

Loan against SIP vs. Loan against shares

Feature Loan against SIP Loan against shares
Collateral required Yes, SIP units Yes, shares
Loan amount Up to a percentage of SIP value Up to a percentage of share value

 

Conclusion

A loan against SIP is a strategic way to access funds while keeping your long-term investments intact. It offers several benefits, including lower interest rates and continued growth of your SIP investments. However, it's important to understand the risks and carefully consider the terms before proceeding. Comparing this option with other loan types can help you make the best financial decision for your needs.

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Frequently asked questions

Can we take a loan from SIP?
Yes, you can take a loan against your SIP investments. By pledging your SIP units as collateral, you can borrow funds without liquidating your investments, ensuring that your long-term financial goals remain intact while accessing necessary liquidity.
Is it possible to get a loan on mutual funds?

Yes, it is possible to get a loan on mutual funds. Financial institutions allow you to pledge your mutual fund units as collateral to secure a loan. The loan amount is typically a percentage of the mutual fund’s market value.

What is the SIP loan process?
The SIP loan process involves selecting a lender, submitting an application, and providing necessary documents. The lender evaluates the SIP units to determine the loan amount based on a percentage of their value. Upon approval, the loan is disbursed to your account.
What is the processing fee for a loan against a mutual fund?
The processing fee for a loan against a mutual fund varies by lender but typically ranges from 0.5% to 1% of the loan amount. It’s advisable to check with individual financial institutions for their specific fee structure and any additional charges.
Can I lose my invested money in SIP?

Yes, you can lose money in SIPs. While SIPs are a great way to invest regularly and benefit from rupee-cost averaging, they are not entirely risk-free. If the underlying mutual fund's performance is poor or the market experiences a downturn, your investments may lose value.   

However, by investing in well-diversified funds and maintaining a long-term investment horizon, you can significantly reduce the risk of substantial losses.

It's crucial to choose funds managed by experienced fund managers and conduct thorough research before investing. 

Is it good to do SIP in debt funds?

Yes, investing in debt funds through SIPs is a prudent financial strategy.

Debt funds offer a relatively stable investment option compared to equity funds. By investing regularly through SIPs, you benefit from rupee cost averaging, which helps reduce the impact of market volatility. Additionally, debt funds can provide regular income in the form of dividends.

However, it's crucial to select debt funds wisely based on your investment goals and risk tolerance. Consulting with a financial advisor can help you make informed decisions.

Can SIP have negative returns?

Yes, SIPs can experience negative returns, though it's less common in debt funds compared to equity funds.

While SIPs are a great way to invest regularly, they are not entirely risk-free. Factors like economic downturns, interest rate fluctuations, and credit risks can negatively impact the performance of debt funds, leading to potential losses.

However, by carefully selecting diversified debt funds and maintaining a long-term investment horizon, you can minimize the risk of significant losses. Consulting with a financial advisor can help you make informed decisions to suit your specific financial goals and risk tolerance.

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