Financial crisis can hit you anytime and therefore you must always be prepared to face them. But sometimes, there may be a situation when you have the funds but you have invested them in different investment avenues and you do not have the extra funds to deal with the monetary needs in your life. In such situations, mutual funds can act as a saviour. You can use them as security to avail a loan from financial institutions or banks. In this article, you will learn all the details about loan against mutual funds.
Let us begin by learning how you can avail loan against mutual funds.
How to Avail Loan on Mutual Fund?
By pledging the mutual fund units, you can avail loan against mutual funds. You can take the loan on mutual fund of any type including equity, debt, or balanced fund. However, it is always advisable to take the loan against equity-based mutual funds and not against debt-based mutual funds. The loan against mutual funds interest rate depends upon the period of the loan. When you opt for taking a loan against the mutual funds, you cannot sell or switch the mutual fund unit that is under lien.
Let us now understand the term lien on mutual funds.
Lien on Mutual Funds
Lien is an important term to understand while availing loans against mf. Lien is a document that gives the NBFC or banks the right to sell or hold your mutual fund's units. When a lien is provided in the favour of bank or NBFC, it means that you have given the ownership right of your mutual fund units to the lender. To transfer the ownership you must visit the fund house and request them to transfer the ownership of your mutual fund units in the name of the lender. The letter for lien transfer must be signed by all the unit holders.
Let us now learn about the process of applying for a loan against mutual funds
How To Apply For Loan Against Mutual Funds
You can avail loan against mutual fund online if your mutual fund units are in demat account and you have prior approval. However, if the mutual fund units are in physical form you can avail loan on mutual fund by executing a loan agreement with the financing company or bank. The bank or NBFC shall ask the registrar of the mutual fund like Karvy or CAMS to mark a lien on the fund units being pledged. The registrar on marking the lien sends a letter to the lender along with a copy to the borrower regarding the same. One important aspect that you must know here is that you cannot redeem the units until full repayment of the loan. The money you get for the loan will depend on the type of mutual funds you own. Banks and other financial institutions often set the maximum and minimum cap on the amount of loan that you can apply for. For example, if you own equity-oriented mutual funds, you can get a loan of up to 50% of the Net Asset Value of the mutual fund.
Let us now learn about interest rates on loans against mutual funds.
Interest Rates on Loan Against Mutual Fund
The loan against mutual funds interest rate will depend on the tenure of your loan. Similar to the terms and conditions, the interest rates vary from one financer to another. In general, the interest on the loan of mutual funds is 10% to 11%. Since this is a secured loan, the interest on this loan is lower than the interest on an unsecured loan. They may even lower the interest rate if you have a good credit score and a long standing relationship with the bank.
Let us now learn how to remove lien on the mutual funds
How to Remove Lien on Mutual Funds
After repaying the loan amount, the financer will send a request regarding the lifting of lien to the fund house. You can even apply for partial removal of lien on making part payment to the financier. However, some units shall still be under the claim of the lender.
Since you know the process of removal of lien, you must also know the consequences if you default the loan.
Consequences of Defaulting Loan Against Mutual Fund
If you default the loan on mf, the financier can enforce a lien for defaulting in making the payment. The financing company holds the right to send a request to the mutual fund company to redeem the units.
Let us now learn about the benefits of borrowing against mutual funds.
Benefits of Borrowing Against Mutual Funds
- You can create instant liquidity by taking the loan against mutual funds.
- Since mutual fund investment remains idle most of the time, you can raise capital for meeting the short term requirements.
- Since the mutual fund is a secured asset, the interest rate of the mutual funds is lower than the interest rate on a personal loan.
- For taking a loan on mutual funds, there is no need for selling the mutual fund units.
The above mentioned are a few of the benefits of availing loans on mutual funds. Raising loans against mutual funds is a rare practice and not many are aware of it. It is also a far better option than other traditional methods of availing a loan. If you are new to the market or need any financial advice, you may contact IndiaNivesh.
Disclaimer: Investment in securities market / Mutual Funds are subject to market risks, read all the related documents carefully before investing.
How to invest in NPS? Building a sufficient retirement corpus after you retire is necessary so that you can live a financially free life. To allow you to save for retirement, there are various investment avenues. The National Pension System (NPS) is one such investment avenue that enables you to build up a corpus for retirement. What is National Pension System (NPS)? The NPS scheme is an investment scheme wherein you can make annual investments until you reach 60 years of age. The investments done into the scheme are invested in the market, allowing you market-linked returns. When the scheme matures, you can avail a part of the corpus in a lump sum while the remaining part pays you annuities, thereby creating a regular source of income for your retired life. Who can choose NPS investments? NPS investments can be made by individuals between 18 years to 60 years of age. The individual can be a resident Indian or a NRI. In the case of NRIs, though if the citizenship of the individual changes during the duration of the scheme, the scheme would be closed. How to invest in NPS? You can invest in an NPS scheme either through an authorized bank or non-banking financial company (NBFC). Currently, most banks and certain NBFCs allow their customers to invest in an NPS scheme through them. These authorized banks and NBFCs are called Point of Presence (POP). Each authorized POP has a licensed branch for accepting NPS investments from customers. Such authorized branches are called Point of Presence Service Providers or POP-SPs, and you can approach such branch and open a NPS account for investment. How to invest in NPS online? With the online medium becoming popular, investing in NPS schemes are also allowed online. For online investments, you can use the net banking facility offered by your bank account. You can log into your bank account and choose to open a NPS account with your bank. You can deposit money through your savings account into the NPS account and start NPS investments. Alternatively, you can invest in NPS online through the scheme’s official website. The steps for online investment through the official website is as follows –• Visit the website https://enps.nsdl.com/eNPS/NationalPensionSystem.html and choose ‘National Pension Scheme’• To invest, you would have to register on the website.• To register, fill up the online application form providing all the relevant details like your name, age, citizenship, address, type of investor, bank account from which investments into the scheme would be made and your PAN card number• Once the form is filled up and submitted, an acknowledgement number would be generated.• A Permanent Retirement Account Number (PRAN) would also be generated. This number would be your NPS account number• Once you e-sign the registration form and submit it, your registration would be complete• After successful registration, you can log into your account and start NPS investments. You would have to provide your PRAN number, the type of NPS account in which you want to contribute and the amount of such contribution A simple process, isn’t it? NPS investment option When you invest in a NPS scheme, there are two investment options that you have. One is the Tier I account, and the other is the Tier II account. Let's understand what these options are –• Tier I Account: Tier I account is a compulsory account which you have to open if you invest in the NPS scheme. The account does not allow withdrawals unless you need money for specific reasons like for meeting marriage related expenses, for a medical emergency, for higher education, etc. The minimum investment in NPS Tier I Account is INR 500 to open the account. Moreover, in one financial year, you have to make an investment of at least INR 1000 in Tier I Account to keep the account operative. If the minimum investment in NPS Tier I Account is not made, the account is frozen. In that case, you would have to pay a penalty of INR 100 to unfreeze the account and make it active. Investments in Tier I Account can be done till you reach 60 years of age or till your close the account prematurely. • Tier II Account: Once you open a Tier I Account, you get an option to open a Tier II Account as well. Tier-II account is optional and can be opened if you want and only if you have a Tier I account in your name. The minimum investment required for Tier II Account is INR 250, and you can withdraw from the scheme as and when you want. This account is not rigid like Tier I Account. Things to remember about NPS investments Now that you know how to invest in NPS and the investment options, here are some important points for you to keep in mind –• You can open Tier I and Tier II account only once in your name. Moreover, one NPS account is allowed for one individual• To invest in NPS you would have to submit your identity proof, age proof, address proof, PAN card, Aadhar card, and passport-sized photos with the registration form to complete the registration and open the NPS account• Investments made into the NPS scheme are allowed as a deduction from your taxable income. You can claim a deduction under Section 80 CCD (1) if you are a salaried employee and contribute up to 10% of your salary and dearness allowance to the scheme. If you are a businessman, contribution up to 10% of your income can be contributed to the NPS scheme under this Section. This contribution is allowed as a deduction up to a maximum of INR 1.5 lakhs, and it includes deductions availed under Section 80C• If your employer contributes up to 10% of your salary and dearness allowance towards the NPS scheme, you can claim an additional deduction under Section 80 CCD (2) independent of Section 80C deduction. This deduction can be claimed both in the old and new tax regimes• You can claim an additional deduction of INR 50,000 if you invest in NPS over and above the deduction claimed under Section 80C, 80 CCD (1) and 80 CCD (2). This additional deduction is allowed under Section 80 CCD (1B). NPS investments are an attractive way to create a retirement corpus and you can even claim tax benefits on the investments done. With the facility of investing online as well as offline, you can choose to invest in the NPS scheme in any way which suits you and create a retirement corpus for yourself. For a better understanding, you can get in touch with our experts at IndiaNivesh for more guidance and assistance for your NPS investments. Disclaimer: Investment in securities market / Mutual Funds are subject to market risks, read all the related documents carefully before investing.
Step up SIPs Systematic Investment Plans, or SIPs, are very popular as they allow you a disciplined approach to investing in mutual fund schemes. You can start a SIP in any mutual fund scheme that you prefer and invest periodically affordable amounts to build up a substantial corpus over a long term period. SIPs offer you the benefits of – Affordable investments Disciplined investments and Rupee cost averaging When you invest through SIP, you choose a fixed amount of money that would be invested at periodic intervals. But what if you want to increase the SIP amount? Can you do so in the existing ongoing SIP investment? For doing that you may have to start a fresh SIP for the additional amount. The current SIP amount would not be allowed to increase unless you have opted for “Step up” feature at the time of starting your SIP investment. Let’s understand what this feature is all about. What is a step-up SIP? A step-up SIP, also called a top-up SIP, is a type of SIP investment wherein you can increase your monthly SIP investment amount periodically at a fixed rate. A step-up SIP, therefore, allows you to increase your mutual fund investments as your income grows. How does a step-up SIP work? A step-up SIP increases your monthly SIP investments in any of the following two modes – By a fixed amount By a fixed percentage When you invest in a step-up SIP scheme, you have to specify which increment mode you prefer, the amount or rate of increase, the frequency of increase (annually or monthly) and the time up to which the increase should be done. When all the details are provided, your SIP commences and then increases at the defined rate and at the defined interval. Let’s understand the working of a step-up SIP by an example – Suppose you choose a step-up SIP of INR 5000 due every month. You choose to increase the SIP by 10% every year for up to 10 years. In this case, when you start the SIP, the first year, your investments would be done @ INR 5000 every month. Thereafter, in the next year, the SIP amount would increase to INR 5500. In the third year, the SIP amount would again increase to INR 6050, and so on. Alternatively, you could choose to increase the SIP by a fixed amount of INR 1000 every year rather than a fixed percentage. In that case, your SIP in the first year would be INR 5000 per month. In the second year, it would increase to INR 6000, then INR 7000, and so on. Thus, under the step-up SIP scheme, your SIP amount would increase by a specified amount every year, allowing you to step-up your investments over time. You can also specify a maximum SIP amount, which would serve as the maximum limit to which the SIP would increase over time. When the increased SIP reaches the maximum specified amount, no more increase would be affected, and your investments would continue at the maximum amount. Benefits of step-up SIPs Step-up SIPs prove beneficial than conventional SIPs because of the advantages that these schemes provide. Such advantages are as follows – You can sync your investments with increasing income During your active working life, your income does not remain stagnant at one level. It increases with the increase in your experience and your appraisals. When your income increases over time, why shouldn’t your SIP increase too? Step-up SIPs allow you to effortlessly increase your investments so that your increasing income is saved to yield an increased corpus. You can accumulate a higher corpus As you increase your SIP investments, your corpus grows. Step-up SIPs allow you to increase your savings even when you are a passive investor. Your marginal propensity to save increases as your income increases through step-up SIPs. A slight increase in your SIP investment can help you meet your financial goals faster. It helps you face inflated costs The higher corpus which you can avail through step-up SIPs also allows you to meet the increased cost of living due to inflation. As inflation raises the cost of goods and services, the corpus that you accumulate through step-up SIPs allow you to meet such inflated costs without any difficulty. It results in disciplined savings Ideally, as your income grows, so should your investments. However, this is seldom the case. As incomes increase, many individuals squander their money in unnecessary indulgences rather than in savings. Step-up SIPs ensure that a part of the increased income is directed to disciplined investments so that you are not tempted to spend your earnings mindlessly. It is convenient Rather than looking for different fund options for a new SIP to boost up your investments, a step-up SIP allows you to increase your investments through the existing fund itself. Step-up SIPs, therefore, provide you with the convenience of managing a handful of funds as you don't have to manage and monitor multiple mutual fund schemes for enhanced investments. Step-up SIPs, therefore, are the ideal solution for increasing your investments over time as your income increases. It is a smart saving solution if you want to create a higher corpus for your life’s goals. Beginners can choose step-up SIPs to start investing small, affordable amounts as they start their mutual fund portfolio and then gradually increase their investments as their income and knowledge grows. So, make your SIP investments dynamic through step-up SIPs. Find out some of the best performing step-up SIPs at IndiaNivesh, and we promise you expert assistance with your mutual fund investments. Disclaimer: Investment in securities market / Mutual Funds are subject to market risks, read all the related documents carefully before investing.
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