5 Things to Know About Loans Against ELSS Mutual Funds KEY TAKEAWAYS
If you are an investor seeking financial flexibility, exploring loans against mutual funds could be your answer. We need to understand what ELSS Mutual Funds actually are. Exploring the ELSS funds and getting to know about their advantages and disadvantages is very important. Learning about the whole application process as well as knowing the repayment process is vital for your financial well-being. Comparing the loan against ELSS vs other financing options will help you make better financial decisions. Many of us would have definitely encountered a time when there was an urgent need for funds.
It could be anything from a medical emergency to urgent house repair costs.
In cases like this, the first that comes to mind is redeeming our investments.
Equity-Linked Savings Schemes (ELSS) have long been recognized as a tax-saving investment option in India.
But, what many usually do not realize is that ELSS investments can also serve as collateral for securing loans.
In this article, we will delve into five key aspects you should know about loans against ELSS mutual funds.
Understanding ELSS Mutual Funds ELSS mutual funds are equity-oriented funds with a dual benefit.
They offer the potential for capital appreciation while providing tax benefits under Section 80C of the Income Tax Act .
ELSS fund’s goal is to generate wealth over the long term.
Its primary benefit lies in the potential for earning attractive returns while saving on taxes.
ELSS funds come with a lock-in period of three years, which is the shortest among all tax-saving investment options.
Moreover, investors can claim deductions of up to ₹1.5 lakhs under Section 80C.
Loan Against ELSS Mutual Funds What is a Loan Against ELSS Mutual Funds? A loan against mutual funds allows investors to pledge their units in ELSS schemes to secure a loan.
The lender provides the loan amount based on the net asset value (NAV) of the units being pledged.
To avail of such loans, investors must meet specific eligibility criteria set by the lending institution.
This typically includes KYC compliance and the creation of a lien on the mutual fund units.
DID YOU KNOW? As of September 2023, overall ELSS AUM is Rs 1.84 lakh crore, out of which retail investors contribute the highest, around 85 percent of Rs 1.57 lakh crore.
Advantages and Disadvantages One of the primary advantages is that it offers liquidity without requiring you to redeem your investments, thereby preserving your capital gains.
However, it is necessary to consider the impact on the investment portfolio as the NAV of pledged units can fluctuate.
Understanding the interest rates , collateral requirements, and potential risks associated with loans against ELSS is vital.
The Loan Application Process The loan application process usually involves filling out forms, providing documentation, specifying the loan amount, and meeting the terms and conditions set by Abhiloans.
Abhiloans offers loans against securities , providing a convenient financial solution with assets serving as collateral.
KYC documents and an agreement to pledge the ELSS units are generally required. The lender may also require a lien on the units.
Repayment and Redemption Repayment can be made through equated monthly installments (EMIs) or as a lump sum at the end of the loan tenure.
Once the loan is repaid, the lien on the ELSS units is lifted, and they can be redeemed or retained as per your investment strategy.
Loan Against ELSS vs. Other Financing Options Loans against ELSS typically offer lower interest rates and require collateral, while traditional loans may have higher interest rates but do not require collateral.
Interest rates, loan tenures, and eligibility criteria may vary between loans against ELSS and traditional loans.
Conclusion Loans against ELSS mutual funds can be a valuable financial tool for those who seek liquidity while holding on to their tax-saving investments.
Understanding the advantages, risks, and tax implications is necessary for making informed financial decisions.
By exploring the specific terms and conditions offered by lending institutions, individuals can harness the potential of their ELSS investments effectively, either for tax savings or meeting financial goals.
Frequently Asked Questions Ans: When you take a loan against mutual funds, your fund units serve as collateral. The lender calculates the value of your fund holdings and offers you a loan amount based on a percentage of that value (loan-to-value ratio). The interest rate, tenure, and repayment terms vary among lenders.
Ans: A lender can put a ‘lien marking’ on your mutual fund units, which stops you from selling or transferring them until the loan is repaid. The mutual fund’s registrar and transfer agent (RTA) is informed about the lien, and the units are ‘locked’ until the loan is fully repaid. Once the loan is paid off, the lien is removed, and you can control your mutual fund units again.
Ans: The fees associated with the process of placing a lien on your mutual fund units are known as ‘lien marking charges’. These charges cover administrative and processing costs for implementing and removing the lien.
Ans: Taking a loan against mutual funds can be a viable option for accessing funds without liquidating your investments. However, it’s essential to consider factors like interest rates, repayment terms, and potential market risks before applying.
