Lakshitha is a salaried individual. She is passionate about traveling and believes that travel is a powerful tool for expanding knowledge and fostering personal growth, offering immersive experiences and exposure to diverse cultures and perspectives. Her close friend was getting married in London and she wants to make use of the opportunity to complete a Europe tour. She wants to fund her tour through a personal loan. But the interest rates seem very high. Is there an alternative ?


A personal loan is typically an unsecured loan, as it is not backed by any collateral like a house, car, etc. and the lender relies on the creditworthiness and financial stability of the borrower for repayment. Hence Personal Loan interest rates are higher. Secured Loans are asset backed and hence they carry a nominal interest rate.

Most salaried individuals invest in mutual funds through SIPs. A loan against mutual funds is an effective way for investors to access liquidity without redeeming their investments. This facility allows individuals to pledge their mutual fund holdings as collateral to secure loan from banks or financial institutions. This is ideal for short term liquidity needs.

ELIGIBILITY:

Lenders generally prefer large-cap equity funds, debt funds, or liquid funds due to their lower volatility. Investors should check with banks and NBFCs on the eligible schemes for pledging.

PLEDGING OF UNITS:

The borrower must pledge by creating a lien in favour of the lender by submitting a lien request to the respective mutual fund house or depository (in case of demat holdings). By doing this, the lender takes control of the pledged units as security for the loan.

DISBURSEMENT:

Once verification is successful, lender sanctions the loan amount based on the LTV ratio (loan to value) , typically 50-70% of NAV for equity funds and upto 80% for debt funds. Funds are then disbursed to the borrower’s account.

INTEREST RATE:

Interest rates on “Loan against MF” are lower than those in personal loans, but vary according to the lender and fund type.

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CA Unnamalai L
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