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00:00 Today we are going to talk about what these are, how do you get them and is this a good

00:04 option if you are looking for short term funding.

00:07 Now to speak on some of these factors, I am joined today by Santosh Joseph who is founder

00:12 of Germinate Investors Services and Raghavendra Nath who is MD of Ladder Up Wealth Management

00:18 Pvt. Ltd.

00:19 Welcome to both of you, Santosh and Raghavendra, great to have you on the show.

00:23 Santosh, let me begin with you and just give us a bit of backdrop and background on loans

00:30 against mutual funds.

00:32 Have they become more popular, how are they used and why are more and more people going

00:36 for it?

00:37 The one that is interesting that many of our mutual fund investors don't even know that

00:43 you have a facility called Loan Against Mutual Funds.

00:45 So therefore, I think this show is going to do a great service for our viewers when they

00:49 get to know that there is a product like this, that is you could avail of a loan against

00:55 your mutual fund.

00:56 In the past, you must have heard about a loan against an FD or a loan against assets, but

01:00 here it is a loan against a mutual fund.

01:02 Now, interestingly, this product has been there for over 20 years, but many people were

01:07 not aware of it and many people didn't know that this was possible.

01:10 Now thanks to the growth of the Indian mutual fund industry and the extreme popularity of

01:15 the mutual fund as an investment vehicle, now even the loan against mutual funds is

01:21 also growing in awareness, which means that when you have a mutual fund unit or units

01:26 or a portfolio and there is a need for you for funds, either for an emergency or for

01:32 a short-term gap, you don't have to sell these units, but these units are actually pledgable,

01:39 can be used as a collateral, borrowed against, repaid back at great convenience.

01:45 So therefore, the loan against mutual fund is an extremely convenient tool for mutual

01:52 fund investors to use their investments without disturbing the portfolio, without compromising

02:00 on selling of the funds to meet short-term or liquidity requirements and make money work

02:05 for you while also have the luxury of liquidity at relatively lower cost to the existing loans

02:11 available.

02:12 I hope that's a summary of the approach.

02:15 No, no, it's a great summary.

02:17 Raghavendra, let me get you in on why these have been around for a while as a product,

02:22 why have they become popular now and secondly, how does this compare, for example, if you

02:29 have a quick need of money to a loan against FD, that question to Raghavendra, or even

02:34 a personal loan?

02:36 Yeah, so yeah, as Santosh was saying, in any case, this has been around for a very

02:41 long period of time and people are now getting more and more aware and it can be used against

02:46 any liquidity crunch that individual investors may have.

02:51 However, the process of taking a loan against mutual fund versus, let's say you set a loan

02:58 against FD or let's say a personal loan is a little more cumbersome process because it

03:04 requires, let's say somebody has five mutual funds and you're taking loan against these

03:09 five funds, then you need to basically go and mark lien against these fund units.

03:15 And when the loan has been repaid back, then you need to take the NOC from the bank or

03:22 the NBFC and again go to the mutual funds to un-lien these.

03:26 And during this period of time, you actually lose all liquidity.

03:30 So if you were to basically wanting to switch from one fund to another, you will not be

03:34 able to do that when this loan is current, or even a small portion of the loan is current,

03:40 because those units are already liened or pledged in favor of the bank or the NBFC.

03:47 So the process is a little cumbersome and therefore it is suitable more when you have

03:54 a large need of funds for a longer duration.

03:58 When you have a small illiquidity or let's say a mismatch in your finances for one or

04:06 two months and a small amount, then probably a personal loan or a loan against FD could

04:12 be better because they are far easier to seek.

04:15 Seems like there are quite a few disadvantages as well and perhaps which is why loan against

04:21 mutual fund is not that popular.

04:23 Santosh, if I were to ask you to compare two other options when it comes to a loan against

04:29 mutual fund versus loan against FD, personal loan, etc., how would you rate that?

04:35 Yes, see there is a reason why they are not popular is because of the way the product

04:41 is, loan is applicable.

04:43 For example, thanks to the great amount of technology today that's available in credit

04:48 cards or loans or those quick easy loans today, a personal loan is dispersed in a few minutes

04:55 if you have got a good credit score and you got access to those apps on the banking platforms

05:01 or the NBFC platforms.

05:02 Whereas a little bit of a difference in the loan against mutual funds is that you got

05:07 to mark a lien against the unit and therefore a longish portfolio will take that many more

05:12 number of liens to be marked.

05:14 So therefore, easily on a comparable time basis, one can be done in a few minutes, other

05:18 one will take at least two to three business days.

05:22 Now on the other hand, when you look at in the mutual fund space also there is limits

05:27 that apply.

05:28 Whereas in a personal loan, if you are looking for a certain particular amount, it's very

05:32 easy and you just get it.

05:34 Whereas in mutual funds, different category has got different limits.

05:37 For example, liquid and fixed income has got a certain percentage margin, equities have

05:41 got a different percentage margin and there may be some schemes that you may or may not

05:45 get even a loan against.

05:47 So there are these subtle differences and I think I agree that this is going to be for

05:51 short term, then credit cards or personal loans will make a big difference.

05:55 Whereas if it's going to be for slightly long term, more strategic in nature that you have

05:59 investments, you don't want to disturb it, you want to raise liquidity against your investments

06:05 without disturbing investment, then loan against mutual funds become handy.

06:09 So essentially it's for a client to manage his cash flows well and bucket it exactly

06:15 for the cash flow that he needs for.

06:17 You know, I also want to understand, let me bring this to Santosh, in terms of interest

06:22 rates, how does it compare?

06:25 In what situation should you even look at a loan against mutual funds?

06:29 And the concern of, you know what, what Raghavendra also said that even if you take a loan for

06:35 a small portion, that entire investment gets sort of locked up, you can't do anything with

06:40 it then.

06:41 Also, what happens if the value, sorry, sorry, just to add to that, what happens if the value

06:45 of the underlying units fluctuates a fair bit?

06:49 Because at the end of the day, they're, you know, mutual fund investments.

06:53 Yeah, so there are two, three parts to this.

06:55 Number one is a category.

06:57 If you are in fixed income, you get a higher margin, but please remember, the interest

07:01 rate variable becomes very critical because you know what returns fixed income can give

07:06 and what interest you're borrowing at.

07:08 So to be honest, it really doesn't make much of a difference if you're having fixed income

07:12 and you want to take a loan against it because there's a very little fine gap between the

07:17 interest that you pay and the returns that you get, depending on the category of fixed

07:21 income.

07:22 Now, some people don't want to break the investment, they don't mind the cost of interest, then

07:26 it maybe justifies.

07:27 Now, coming to equity, considering equities are a volatile asset class, the margins are

07:33 limited.

07:34 You get maybe at best 55, 60% margin on equity funds.

07:37 And there again, if there's a sharp, sudden fall, there will be a margin call.

07:41 They will ask you to fund the difference in the gap between the fall in the mutual fund

07:47 value versus the amount you borrow.

07:49 Now that's, that apart, the cost of interest that you pay on the loan against mutual funds

07:56 at sometimes are attractive and lower than what you traditionally pay for personal loans.

08:00 So is there a clear advantage there?

08:02 The answer is yes.

08:03 The second biggest advantage, notwithstanding the cost, is also the utilization.

08:08 Now in a personal loan, whether you use little money or more money, once the loan is dispersed,

08:14 you pay interest on the overall amount.

08:15 Whereas in loan against mutual funds, by and large, it is an overdraft kind of a product.

08:21 You pay only on utilization and you pay less based on your repayment.

08:26 For example, you borrowed 5 lakhs, you paid 2 lakhs, you only have a differential of 3

08:30 lakhs, you pay interest only on the outstanding loan amount.

08:33 So there's a little bit of convenience in the loan against mutual funds in terms of

08:38 how you are charged interest and how when you pay back, there's no penalty to pay back

08:42 and you only pay for the residual amount.

08:45 Whereas the interest rate itself can be a little softer than the traditional personal

08:49 loans.

08:50 And you know, just that question to you as well, Raghavendra, is the big problem, apart

08:54 from the fact that your investment gets stuck while your loan is on, the variance in the

09:00 value of the units?

09:02 Yeah, that's right.

09:05 I think generally, you know, when you are looking at when an NPFC is disbursing the

09:11 loan, they are mindful.

09:13 And that's why, as Santosh said, that let's say typically, and I've seen that for many

09:18 clients of ours, whenever we have taken a loan against equity mutual funds, NPFCs don't

09:24 extend beyond 50%.

09:27 And I think 50% is good enough for them to cover for any volatility, which will happen

09:31 in the next few months or whatever.

09:33 So unless there's an extreme event, like a global financial crisis, the margin calls

09:38 may not happen because NPFCs in any case are very mindful of the risks that they are taking.

09:43 So that is not such a big concern.

09:47 I think where investors can benefit a lot is the lower interest rate, because you can

09:54 actually negotiate interest rate in loan against mutual funds.

09:58 Because you see, it's a secured product, the NPFC can sell your units at any time and recover

10:04 the money if you don't pay them.

10:08 So it's a secured product.

10:10 And because the liquidity of mutual funds is very high, an NPFC will prefer a pledge

10:17 of units against, let's say, a pledge of a car or a pledge of a house, because selling

10:23 them is far more difficult than selling a unit.

10:26 So the rate of interest can be negotiated depending on the quantum and the amount and

10:31 the amount of margin that you are ready to give up.

10:34 So let's say if you have 50 lakh rupees worth of units and you only want 10 lakh rupees

10:40 of loan, NPFC will be able to give you a very, very fine interest.

10:46 Absolutely.

10:47 So, so those are the factors you need to consider when going in for a loan against mutual fund.

10:53 There are some pros, there are some cons as well.

10:55 We'll take a very short break.

10:57 But Santosh and Raghavendra stay with us because on the other side, we answer your queries.

11:02 Stay tuned.

11:03 [MUSIC]

11:10 [BLANK_AUDIO]

Pros & Cons Of Loan Against Mutual Funds | NDTV Profit

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