Investing in mutual funds is a great way to grow one’s wealth over time. However, at some point, one may need to liquidate their investments for any unforeseen expenses or emergencies. In such cases, one may be reluctant to redeem the funds as it can attract a large tax liability. This is where Loan against ELSS Mutual Funds or Equity Linked Saving Scheme comes into the picture. A Loan against ELSS Mutual Funds is a loan or credit facility offered to the investor by the financial institution or lender against the pledge of the fund units as collateral.
ELSS Mutual Funds are considered to be more tax-efficient than other mutual funds as they offer tax-saving benefits under Section 80C of the Income Tax Act. As per the current regulations, an investor can invest up to Rs. 150,000 per year in ELSS and claim a tax deduction on the same. The minimum lock-in period for these investments is three years, which makes them an ideal investment option for long-term wealth creation while saving on taxes.
When an investor takes a loan against ELSS Mutual Funds, the lender disburses a loan amount in exchange for the pledge of the ELSS fund units. The lender holds the units as collateral until the loan is fully repaid. The amount of loan disbursed by the lender varies depending on the value of the pledged units. Generally, lenders offer up to 50% of the value of the pledged units as a loan.
One of the biggest advantages of taking a Loan against ELSS Mutual Funds is that there is no need for the investor to sell the units to meet their financial needs. This allows the investor to keep their investment intact and continue to earn returns on their investments. Investors can redeem the pledged units once the loan is repaid.
The loan against mutual funds interest rate is generally lower compared to other loans as the lender has the collateral to mitigate their risks. However, the interest rate charged by the lender may vary depending on the loan amount, the loan tenure, and the track record of the borrower. The interest rate for Loan against Mutual Funds generally ranges from 9% to 20%. It is important to compare the interest rates offered by different lenders before availing of the loan.
Investors should also be aware of the risks associated with taking a loan against ELSS Mutual Funds. The value of the mutual fund may fluctuate over time, which can impact the amount of loan that can be availed against the pledged units. If the value of the ELSS Mutual Fund units falls significantly, it may lead to a margin call, and the lender may ask the borrower to pledge additional units or repay a part of the loan. It is therefore important to carefully monitor and manage the investment portfolio to avoid any margin call situations.
In addition to the interest rate charged, lenders may also levy processing fees, prepayment charges, and other charges on Loan against ELSS Mutual Funds. It is important to understand all the charges associated with the loan before availing of the same.
Another important factor to consider while taking a Loan against ELSS Mutual Funds is the loan tenure. The loan tenure can range from a few months to a few years. It is important to choose the loan tenure that suits one’s financial needs and repayment capacity. A longer loan tenure may result in lower EMI payments, but it may also increase the total interest cost of the loan.
Before availing of a Loan against ELSS Mutual Funds, investors should also consider the impact of the loan on their credit score. Late or missed payments can negatively impact one’s credit score and make it difficult to avail of credit in the future. It is important to ensure that one has a strong repayment plan in place to avoid any negative impact on the credit score.
In conclusion, a Loan against ELSS Mutual Funds is a great way to maximize the investment potential and meet one’s financial needs without having to sell the units. However, investors should carefully evaluate the pros and cons of the loan before availing of the same. It is important to choose a lender with a good reputation and compare the interest rates and other charges to make an informed decision. With due diligence, investors can benefit from the Loan against ELSS Mutual Funds and achieve their financial goals with ease.