Investments apart, MF units can also be collateral during a cash crunch!
Authored by Krishna Kanhaiya Director and Chief Executive Officer (CEO) of Mirae Asset Financial Services (India) Pvt Ltd
Mutual fund (MF) units can generate returns not just through investments, but also through collateralization during a cash crunch. Retail investors often redeem their equity mutual funds before two years, missing out on the potential for long-term wealth generation. Even a higher percentage of investors redeem between three and five years. Experts suggest that early redemption is primarily due to two reasons: non-performance of a particular scheme and portfolio balancing for monetary needs. While these first two reasons can't be avoided, leveraging mutual fund investments by availing a loan instead of redeeming them could be an option to explore for covering short-term expenses.
Historical data indicates that staying invested for five years yields a 12-15 per cent return, compared to just 9 per cent in two years, with a 30 per cent chance of generating a 12-15 per cent return in five years. Additionally, investors faced negative returns in only 0.13% of cases invested for five years, compared to 12 per cent in two years.
With mutual fund assets under management crossing over Rs 40 lakh crore, MF units are emerging as new collateral, potentially better than conventional gold and real estate. Loans against shares or mutual fund units have been offered in the past, but the process was tedious and time-consuming. However, the digital era now allows borrowers to complete the process in six steps using an app in as little as 15 minutes for a loan against mutual fund units, and same-day approval for a loan against shares.
Loans against MF units and shares offer an economical and convenient way to access emergency funds without selling off long-term investments. In contrast, other loan options like personal loans, credit cards, gold and property loans have higher interest rates, foreclosure charges, and processing fees.
In conclusion, availing a loan against MF units or shares can be a great tool for emergency funds while allowing long-term investments to grow. With the added convenience of digital processes and the potential for higher returns, leveraging MF units as collateral is an attractive alternative to traditional loan options.