HDFC's digital loan facility a quick way to meet short-term cash crunch

HDFC Bank in partnership with CAMS, a registrar and transfer agent (RTA), has launched a digital loan facility wherein bank customers can borrow against the mutual funds in their portfolios. Currently, this facility is available only to those who hold mutual fund schemes from one of the 10 fund houses for which CAMS is the RTA. While the facility for loan against mutual funds is already available, the HDFC-CAMS overdraft (OD) facility is entirely online. 

This facility can be availed through HDFC bank's net banking portal. The whole process can be completed online and requires no documentation. The interest rate is 10-11.5 per cent and customers also have to pay a processing fee of Rs 1,499. "The OD facility can help customers tide over emergency situations that require instant cash. Other loans could require paperwork and be more time taking," says Amar Pandit, founder, HappynessFactory.in. HDFC Bank claims that loan disbursement will happen within a few minutes. Since this is an overdraft facility, you can borrow money again and again.  

During emergencies, you can even sell off your investments, but you may have investments that are locked in. "You may have invested in a fixed maturity plan (FMP) or in an ELSS fund that you can't exit. Or you may have invested in a product that is yet to cross the exit load period, or will require you to pay short-term capital gains tax rate. In such circumstances, the OD facility can be useful," says Deepesh Raghaw, founder, PersonalFinancePlan.in, a SEBI-registered investment advisor (RIA). 

A key limitation of this facility is that it is available only against 10 mutual fund houses. Another point to note is that since this is an OD facility, the amount you can borrow can be reduced if the value of your mutual funds fall in a declining market. If you take a loan against your mutual fund holdings, you won't be able to sell them until you have repaid the loan.   

Customers need to weigh whether it would be better to sell off their mutual fund holdings or take a loan against it. "Only a long-term portfolio of equity funds will generate this kind of return (the 10-11.5 per cent interest rate charged). You may not want to disturb this portfolio to meet short-term liquidity needs, in which case you may use the OD facility," says Pandit. In case of equity funds, you should also take into consideration the level of the markets. If they are high, you may sell while if they are at a low level, selling at a loss may not be a good idea. According to Raghaw, "Debt funds won't generate a return of 10-11.5 per cent, and hence in their case selling may be a better idea." The investor may also prefer the OD facility if the fund hasn't crossed the exit load period, or he could be saddled with short-term capital gains tax. "In most other circumstances, selling off your mutual fund holdings would be a better option than taking a loan against it and paying a high rate of interest," adds Raghaw.  The decision to borrow, rather than sell the investment, can only prove right if the asset earns more than 11.5 per cent, he says.

Other loan options for availing of quick cash are also available. A personal loan gets sanctioned quickly and may cost you almost the same rate (10-12 per cent) or slightly higher if you have a good credit history.  A loan against property will cost you less but the documentation involved is tedious and is not worthwhile if the amount you require is small. Loan against gold is another option, but here the valuation and other processes take time.  An offline loan against mutual funds takes around five to six days to process. Sometimes, there are loan offers on particular consumer goods that are available for as little as 5-6 per cent and can be a better option.  

Finally, financial advisors warn against borrowing to invest. "You may avail of this facility for a temporary period. But borrowing to invest is not a sound strategy for the long term," says Pandit.

Outbrain