Photo: iStockphoto
Photo: iStockphoto

Take a loan against your mutual fund only if you really need it

If markets are in a bull phase, it makes sense to redeem your investments

Say, you have investments in mutual funds (MFs), and you need money urgently. Do you redeem your investments? HDFC Bank Ltd seems to suggest you shouldn’t. It launched its digital loans against mutual fund on 23 May. It is an overdraft facility that promises to give you money within minutes. Should you opt for it?

What is it?

At present, it is possible to take loans against mutual fund and equity share holdings. But HDFC Bank’s loan against funds is completely online and paperless. You just need an HDFC Bank savings account.

The bank will offer loans against fund houses that Computer Age Management Services Ltd (Cams; one of India’s largest registrar and transfer agents) services. So far, it will cater to 10 fund houses (see graph), but Arvind Kapil, group head–unsecured loans, home and mortgage loans, HDFC Bank, said it will eventually offer loans against MF units of other fund houses as well, including those serviced by other R&Ts such as Karvy Computershare.

The process is simple. Log in to your internet banking account, fill in basic details, and choose if you want to hypothecate equity or debt funds. The bank will re-direct your application to Cams, which will verify your MF holdings. As per Reserve Bank of India (RBI) rules, you can avail loans up to 50% of your equity funds and 80% of your debt funds. HDFC Bank offers loans of Rs1-10 lakh on equity funds and up to Rs1 crore on debt funds. It is an overdraft facility, so there is no tenure, but the loan is to be renewed annually.

After you choose the funds and the number of units, your application goes into processing, and you get your money in minutes. As per RBI guidelines, you need to open a separate current account (at HDFC Bank) where the bank will deposit your loan amount.

What works?

The process needs no documentation and is online. Also, you need not have bought funds from HDFC Bank. Units bought from others are also eligible securities here. On the Cams website, you can see all your holdings at one place.

When you take a loan against your MFs, you still own them; you just can’t sell them till you repay your loan.

What doesn’t?

As of now, this facility is available only on folios with a single holding. “But very soon, other holding pattern folios will also be made available," says Kapil.

Loans against securities and funds are expensive. The bank didn’t commit on the interest rate, saying it would “depend on the customer’s relations with the bank", but Kapil indicated a rate of 10-11.5% per annum. Add a flat processing fee of Rs1,499 per transaction.

Mint Money take

Almost a year ago, NJ India Invest Ltd, one of India’s largest MF distributors, also started offering loans against MFs, along with Bajaj Finance Ltd. NJ India Invest holds its investors’ MF units in dematerialised form, so a tie-up with a R&T isn’t necessary. As an investor, this doesn’t matter, but if you aren’t an NJ India Invest’s customer, then your only choice to take a loan against MFs is HDFC Bank, if you are want an easier way.

The question is: should you take a loan against MFs? “The only situation when you can think of taking such a loan is if equity markets drop sharply and you lose, say, 20-25% of your corpus and you need money urgently. Instead of selling your MFs at a loss, you can take a loan and retain your units. When markets recover, your funds will grow back," said Amol Joshi, founder, PlanRupee Investment Services. But if your portfolio is in profit and you need money, it’s better to sell your holdings instead of borrowing, he said.

Misbah Baxamusa, national head – sales, NJ India Invest, suggested taking a loan, if required, that is less than 50% of the lien units’ value “If markets fall, you would not be called upon to repay your loan amount prematurely or offer more units in lien. Keep that margin of safety," he said.

If markets are in a bull phase, it makes sense to redeem your investments. If markets are bearish, it may make sense to borrow if you need money urgently. If you must, then borrow wisely.

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