Mutual fund investments are subject to market risk. So, never invest the money that you need in times of emergency and invest only that part of money, which you may spare for a long time.
However, even after a reasonably long-term investment period, prolonged low-market phase may prevent you from redeeming the units due to loss of opportunity to earn higher return when is market is up.
In rare cases, the fund value may even go below the amount of capital invested, and redemption may result into a capital loss at that point.
Such a market phase may frustrate you, if you are near your financial goal and need funds without waiting further for markets to move up. So, how to get money in such a situation without suffering any capital loss or without losing the opportunity to earn more?
You may try the ‘Loan Against Securities’ option and get loans from a financial institution against the mutual fund units you are holding. This would save you from suffering capital loss and provide you the opportunity to fetch higher returns as you will get more time to redeem.
Loan Against Securities is basically an overdraft facility in Indian rupees (INR) sanctioned against pledge, transfer or lien of approved securities like shares, mutual funds, life insurance policies, bonds, etc.
The loan may be availed by individuals who are Indian residents, NRIs, owners of – Sole Proprietorship, Partnership Firm, Private Trust, Private Limited Company or Public Limited Company.
To get money quickly, you may pledge your mutual fund investments online and get an overdraft limit set in your account.
Tentatively, you may get a loan up to 50 per cent of Net Asset Value (NAV) against your Equity Mutual Fund units, and against Debt Mutual Funds and Fixed Maturity Plans (FMPs), you may get a loan up to 80 per cent of the NAV.
Moreover, you don’t have to pay interest on the entire value of investment pledged, but the interest is calculated only on the amount of the loan actually used. You may pay interest by way of credits in your account every month.
The repayment process on Loan Against Securities is generally easier than other loans and mostly without any prepayment and foreclosure charges.
So, you may repay the loan as per your convenience and get your investments back to redeem when the market is up.