Digital loan against mutual funds (LAMF) - Should you opt?


 Are you in the midst of financial distress? Are you pressed for time and in an urgent need for money? Do you mind liquidating your current investments? If the answers to these questions are a YES then redemption of your investments or availing a loan against them would be the best way to do away with the unexpected cash crunch. This is how it is generally done and this is how an investor would think. However, physically loaning against mutual funds or redeeming mutual fund investments both involve extremely time consuming procedures. Taking a loan against a mutual fund investment is time intensive and does not even guarantee quick money in case of an emergency. Therefore, HDFC's novel concept of a digital loan against mutual funds seems worth exploring and could possibly help someone in a financial emergency to heave a sigh of relief.

HDFC's new product launched recently this year has automated the entire process of availing loans against mutual funds (LAMF). This will drastically cut down on the time spent on application, documentation, approval and transfer of loan amount. Investors will be able to avail loans within minutes; provided the amount is utilized strictly for personal purposes only. The loan qualifies to finance any untoward emergency or unexpected personal event. This facility is available to all the HDFC customers who are resident Indians. A first time borrower with absolutely no credit history is also eligible to avail this product. Given all its features, this online initiative by HDFC is definitely noteworthy.

The principal benefits of Digital LAMF are:

  • You can avoid selling your best performing mutual fund and use LAMF in case of urgent money requirement, therefore customer retains MF portfolio without liquidation (customer remains the owner of the mutual fund and can only sell it post loan repayment)
  • Instant loan approval and availability of money in few minutes
  • Entire process is online, no physical visit to bank branch
  • Loan offered against both debt and equity mutual funds
  • Loan can be extended to first-time borrowers without credit history
  • Overdraft account and interest applicable only on the utilized amount and not for the opted amount
  • New loans can be taken and loan amount can be extended and enhanced any time
  • Being a loan against security, interest rate charge is lower than conventional personal loans

The benefits of Digital LAMF are great. But should we opt for it?

The ideal condition which probably demands taking a loan against mutual funds is when the equity market is weak. In such a situation, the investor should avoid the risk of selling the mutual fund units as that would incur a loss. Therefore, availing a loan against mutual funds to arrange for the required amount and waiting for the market to get back to normalcy should be the preferred approach. A bullish market favours redemption of investments. However, borrowing money in a bearish market is justified as it is better than redeeming investment at a loss.

Digital LAMF is best suited for the above condition as it will accelerate the whole loan approval -transfer process almost instantly and provide you with the loan amount in a few minutes on the day of request itself. How better can it get for investors on the lookout for speedy money to fund their emergencies? The loan amount as mentioned before should be used only for cases involving extreme emergency indicating urgency and not for the purpose of splurging on luxury items or investment in capital market. Additionally, it should not be used for land and gold purchase along with gold bonds, mutual funds or ETF.

Digital LAMF sure is a good way to leverage mutual fund portfolio and utilize the funds without liquidation of investments in the wake of difficult circumstances such as medical crisis, employment loss and similar tragedies in personal life.

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