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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.
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