Key Things to Know About Loans Against Mutual Funds
In case of any financial emergencies, you look out for existing savings or liquidate your investments even at the loss to meet the requirements. If it is still not enough, you also look for a loan. However, taking on an avoidable debt may not be the best thing to do.
You would have come across loans against land, gold or home. But, do you know that you can take a loan against your mutual funds? You heard it right, instead of selling them in case of any financial emergency, you can have a loan by pledging your mutual funds.
Here are the key things that you should know about –
- Existing mutual funds investment remains unaffected – While your MFs may go on a lien till the loan is on, they will keep growing with the markets and earning interest, as the case be while remaining in your name – just that you cannot sell the MFs which are under lien till the loan is paid back. Also, loans against MFs have interest rates much lower than personal loans or credit cards. When the loan is fully repaid, the lien is removed.
- Loan up to a certain limit – The amount you can borrow will depend on the type of mutual funds you hold. Typically loaning agencies will offer loans up to half of the Net Asset Value (NAV) for equity mutual funds, and higher amounts for debt funds.
- Many agencies including banks provide such loans – Banks are major agencies giving such loans. Apart from this, there are many other agencies which give loans much more quickly, generally within a day and fully online though at higher interest rates. Many banks lend money only against a selected set of mutual fund schemes. For instance, SBI provides loan only against SBI Mutual Funds holdings, and banks such as HDFC and ICICI are also very selective about the schemes against which they lend money. When the market is in a slump, taking loan against MFs rather than selling them can be a smart move. By avoiding selling your investments, you can ride out the storm. When the market bounces back, so will the value of your mutual funds.
Should Variety Be the Spice of Life in Mutual Funds too?
‘I want to invest some more money but don’t give me the same mutual funds that I already have!
No, I don’t accept this – will you invest all my money in just Five funds?’
Over-diversification can impact expected investment returns: When someone invests in too many products, the degree of this risk-correcting marginal loss on expected returns increases – to an extent that it starts eating into the marginal benefit of risk-reduction. As such, over-diversification can turn out to be a self-defeating exercise by impacting your expected returns. The overall counter-risk benefit can be too feeble and negligible to help meet your financial goals in time.
Over-diversification can become unmanageable: It can get unmanageable to keep track of, and evaluate the performances of, too many investments because several active investment tools (like stocks, commodities, and even certain mutual funds) may require constant monitoring and re-calibration.
How to secure optimal diversification of investments: The good old notion that ‘quality is better than quantity’ holds even when it comes to diversification of investments. Optimal diversification of investment can be secured if the portfolio is distributed only amongst meaningful instruments according to the investor’s financial goals, risk profile and monitoring capability.
SAFE Investment Strategy to Navigate 2023
As an investor, we often find ourselves caught between the desire for high returns and the need safety. It is a constant dilemma, but one that can be resolved by sticking to the fundamentals of investing and seeking out safe opportunities.
In 2022, equity markets globally underwent a sharp correction, leaving investors on the lookout for a safe strategy to navigate 2023. The SAFE strategy offers a framework that investors can use to ensure they remain successful in the face of market upheavals. And here, SAFE stands for:-
S: Secure your yield: Not all asset classes perform over the same time horizon. Equity performs during an economic expansion, while debt and gold perform during market fear and recession. Last year, central banks have rapidly raised the interest rates in the economy to control inflation and other macroeconomic issues. The impact of that on the debt market has been a sharp rise in bond yields, making them very attractive for long-term safe investment for investors at this point. That is the reason we launched DOP (Debt Opportunity Portfolio) recently which will only be open till this opportunity exists and is meant to take advantage of this opportunity which has opened up after many years.
A: Allocate for the long term: Rome was not built in a day – this famous idiom we have heard a lot of times. The same idiom applies in investing; when we invest in equity for the long term, we enjoy the benefit of compounding, and when we invest in debt funds for the long term, we enjoy the indexation benefits which beats all other safe products. In 2023, we believe that tactical income opportunities from exposure to debt funds and some long-term equity portion will help the investors to create wealth.
F: Fortify against further surprises: While attractive bond yields offer optimism to investors in 2023, we believe investors should be ready for surprises in their portfolios on the equity side. Maybe, a balanced and defensive portfolio with a mix of cash, gold, bonds, and equities would be a prudent approach to ride out any market uncertainties.
E: Expand beyond the traditional: Investors with lesser risk appetite usually choose traditional investment options like gold, FDs, real estate etc, but these assets have somewhere lost their charms amongst new investors. Their substitutes have become more attractive like REITs instead of Real estate, Bonds, debentures and debt mutual funds instead of bank FDs and sovereign gold bonds, gold funds and gold ETFs instead of physical gold along with exposure in pure equity or equity mutual funds. In fact, that may be a more prudent investment strategy for 2023 as we go forward.
(Contributed By Ujjwal Dubey, Associate Financial Planner, Team Prithvi, Hum Fauji Initiatives)