With the rise of digital lending platforms, borrowers now have a plethora of options available when it comes to availing loans against mutual funds. Digital loans against mutual funds are gaining popularity due to their convenience and ease of access. However, like every financial product, they come with their own set of pros and cons. In this article, we will explore the advantages and disadvantages of digital loans against mutual funds.
Pros of Digital Loans Against Mutual Funds:
- No Need to Liquidate Investments – One of the biggest advantages of digital loan against mutual funds is that borrowers can avail of loans without liquidating their investments. This means that they can continue to reap the gains from their mutual fund investments while also availing of the funds they need. Moreover, liquidating investments can also lead to capital gains tax implications which can be avoided with digital loans.
- Fast Processing – Digital loans are known for their fast processing times. In the case of loans against mutual funds, borrowers can typically receive the funds within 24 to 48 hours of applying. This is especially useful in situations where there is an urgent need for funds such as in the case of a medical emergency or a business opportunity.
- No Collateral Required – Digital loans against mutual funds are typically unsecured loans and do not require any collateral. This means that borrowers do not need to pledge any asset such as property or gold to avail of the loan. Moreover, since mutual funds are already considered to be a safe investment option, borrowers can also avail of the loan at competitive interest rates.
- Flexible Repayment Options – Digital loans against mutual funds also come with flexible repayment options. Borrowers can choose the repayment tenure and frequency that suits them the best. Moreover, there are typically no prepayment charges in case the borrower wishes to repay the loan earlier than the agreed-upon tenure.
Cons of Digital Loans Against Mutual Funds:
- Interest Rates – The loan against mutual funds interest rate on digital loans against mutual funds can be higher than those on traditional loans such as personal loans. This is due to the unsecured nature of the loan and the perceived risk associated with it. Therefore, borrowers must carefully consider the interest rates before availing of the loan.
- Impact on Mutual Fund Investments – While borrowers do not need to liquidate their mutual fund investments to avail of digital loans against mutual funds, the loan can impact their investments. This is because the mutual funds are used as collateral and their value may be affected by market fluctuations. Moreover, if the borrower is unable to repay the loan, the mutual fund units may be sold to recover the amount.
- Availability of Funds – The availability of funds through digital loans against mutual funds is typically limited to a percentage of the value of the mutual fund units. This means that borrowers may not be able to avail of the entire value of their mutual funds as a loan. Moreover, the availability of funds may also be restricted based on the creditworthiness of the borrower.
- Eligibility Criteria – While digital loans against mutual funds are easy to apply for, borrowers need to meet certain eligibility criteria. This can include having a minimum net worth, a good credit score, and a certain level of investment in mutual funds. Moreover, they may also need to complete certain documentation such as KYC verification.
Digital loans against mutual funds can be a viable option for borrowers who wish to avail of funds without liquidating their investments. While they provide fast processing times and flexible repayment options, borrowers must also consider the interest rates and impact on their mutual fund investments. Moreover, they must ensure that they meet the eligibility criteria and carefully read the terms and conditions before availing of the loan. As with any financial product, borrowers must assess their financial situation and requirements before making a decision.