What is a Loan Against Mutual Funds (LAMF)?
Life throws curveballs, and sometimes you might need immediate cash for emergencies. While traditionally, selling off mutual funds might seem like the answer, it can disrupt your long-term investment plans. This is where Loan Against Mutual Funds (LAMF) comes in.
A LAMF allows you to borrow money against the value of your existing mutual fund holdings. You essentially use your mutual fund units as collateral for the loan. This means you don't have to sell your investments, and your funds can continue to grow potentially.
Here's a breakdown of how LAMF works:
You approach a bank or financial institution offering LAMF.
The lender evaluates your mutual fund portfolio and determines the loan amount you can qualify for. This is typically a percentage (around 50% for equity funds and 75-80% for debt funds) of the Net Asset Value (NAV) of your mutual funds.
You pledge your mutual fund units as collateral for the loan.
You receive the loan amount and repay it with interest over a fixed tenure.
Benefits of Using LAMF for Emergencies:
Preserve your investment: Unlike selling your mutual funds, LAMF allows you to access cash without disturbing your long-term investment goals. Your investments continue to grow potentially, while you manage the emergency.
Quick and convenient: LAMF is a relatively quick and hassle-free process compared to applying for a new loan.
Interest on utilized amount: You typically only pay interest on the amount you borrow, not the entire loan limit.
Examples of How LAMF can Help in Emergencies:
Urgent medical bills
Sudden home repairs
Unexpected car repairs
Child's higher education needs
Things to Consider Before Opting for LAMF
Margin requirements: The loan amount you get will be a percentage of your mutual fund's value. Ensure you can comfortably repay the loan within the tenure.
Interest rates: LAMF interest rates can be higher than some other loan options. Compare rates offered by different lenders before making a decision.
Market volatility: If the market value of your mutual funds falls significantly, you might receive a margin call, requiring you to add more collateral or repay part of the loan.
Conclusion
LAMF is a valuable tool to consider when facing emergencies. It provides quick access to cash without disrupting your long-term investment plans. Remember to carefully evaluate your situation, compare interest rates, and ensure you can comfortably repay the loan before opting for LAMF
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