Distribution platforms look at offering loans against MF units to investors

Experts say small businessmen facing temporary working capital challenges can especially benefit from this facility
Mutual fund (MF) platforms and distributors are planning to offer loans against MF units to investors looking for short-term emergency liquidity but don’t want to withdraw MF investments planned for a longer term.

“This facility can help investors in need of short-term capital, such as those with temporary cash-flow issues in their businesses or even individual investors, who expect the markets to rebound and don’t want to exit at this stage,” said Gaurav Rastogi, founder and chief executive officer at Kuvera.in, an online investment platform.

Rastogi says the facility has seen strong interest recently amid the Covid-19 pandemic, which triggered economic uncertainty.

Investors can get these loans at a 9-10 per cent interest rate. Experts say small businessmen facing temporary working capital challenges can especially benefit from this facility, as the interest rates for unsecured loans can typically be in the range of 15-20 per cent.

Recently, ICICI Bank also launched a facility to give loan against MF units. Some banks are already offering this loan facility to their customers. 
Among online platforms, Zerodha is also planning to soon roll out loan against securities in a phased manner, which will include lending against MF units.

ETMoney is also looking at entering this space. “We would want to offer loan against MF units, but through our own non-banking financial company (NBFC). The spreads in this space are not much. So, unless it is done through own NBFC, it may not be a sustainable model,” said Mukesh Kalra, founder and chief executive officer of ETMoney.

 
As such loans are available as an overdraft, borrowers do not have to pay a fixed EMI, but pay interest on the limit utilised and for the number of days it was utilised.

Some advisors also suggesting this loan option to investors in a bid to discourage them from fully liquidating their assets. “Investors can consider such loans as an alternative. The markets can rebound and selling at this stage can deny investors recovery from the potential upside,” said an independent financial advisor (IFA).

However, some advisors suggest caution when an investor considers such a loan. “Loan against MF units can turn tricky if the markets correct further. This may lead to more margin requirements, interest-obligations, and also erode MF investments,” said Bharat Bagla, an MF distributor.

Experts say investors with long-term funding requirement are better placed to liquidate their MF units, rather than pay interest on the borrowing.

Market participants say loan against MF units can emerge as a larger play in the coming months, as banks have turned cautious on loan against shares (LAS) following the Karvy episode.

“Lenders have become wary after the Securities and Exchange Board of India (Sebi) directed transfer of their collateral to the clients,” said the head of a broking house.


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