Oct 20, 2020
- Are you a borrower who is tired of repaying the installments of your loans?
- Are you feeling the burden of heavy interest on your pockets every month?
- Are you rotating your credit card limit and paying heavy charges and interest every month?
If yes, then this write-up is surely for you! Please go ahead to have a look upon it.
The concept which we are going to discuss is “Overdraft facility against mutual funds”. Let’s first understand all the basics of this concept.
What does this facility mean?
Investors of Mutual funds can avail this overdraft facility against their mutual fund holdings. Financial institutions like banks and NBFCs mark lien on your mutual fund units in their favor and provide you the loan.
“Lien” here means that the units cannot be sold or redeemed by the investor till the overdraft facility is closed.
Maximum Limit of Overdraft facility: -
| Type of fund | Limit of Loan/ Overdraft |
|---|---|
| Equity | 50% of the Fund Value |
| Debt | 70-80% of the Fund Value |
Interest rates applicable: -
As the loan is backed by an asset, interest rates are lower than that of a personal loan/credit card/high cost home loan and are typically in the range of 10-11% per annum. But, the interesting thing to note here is that the interest will be charged only on the amount outstanding as credit in a particular month, not on full limit (Will be clarified in illustration below).
So, What’s the plan?
To understand clearly, let’s assume that you have debt funds worth Rs.1,00,000 and equity funds worth Rs. 40,000.
You owe a personal loan of Rs.1,00,000 carrying interest @15%. So, currently you are paying Rs. 15,000 (Rs. 1,00,000*15%) as interest along with a particular amount of principal as EMI of your loan.
Now, under the planning discussed above, what you have to do: -
Step 1: - Create a lien on your mutual funds against which you will get the following amount of overdraft limit at an interest rate of say, 10% p.a.: -
| Against Debt fund | 80% of 1,00,000 | 80,000 |
| Against equity fund | 50% of 40,000 | 20,000 |
| Total Limit | 1,00,000 |
Step 2: - Take this credit of 1,00,000 and repay your personal loan fully. This will save your monthly interest of Rs. 15,000 and the burden of EMI each month.
Step 3: - Now, use your overdraft facility account as your savings account and keep all spare money or money for near term use in this account. Let’s say you have Rs. 60,000 as your savings. Keep this amount in the overdraft facility account. It will reduce its credit balance to Rs. 40,000 (1,00,000 – 60,000) and the interest now charged will be just Rs. 4,000 (40,000*10%).
So, in this way, you are saving Rs. 11,000 p.a. with such a small smart plan.
Also, there is a Hindi saying for finance matters “Paise ka na jaana bhi aana hi hota hai”. So, by saving your interest expense, you are actually generating this extra cash.
Easy Operation of the current account by different individuals: -
-
Are you a salaried person?
Oh! You are sorted. Just keep transferring your monthly salaries in the current account provided. It will automatically keep your credit balance low, hence, contributing to lowering the interest expense. -
All the Business persons, take a look here: -
Try to accept all your business payments in the account provided for the overdraft facility. Also, if you have to make any payment on a certain date, say 15th of every month, keep the money so needed in this account till the payment is due which will lower the amount on which interest has to be levied. -
Credit card rotators, here is a big present for you: -
Instead of transacting through the credit cards carrying 40-42% interest, why don’t you give this facility a try? Repay your entire credit card outstanding with overdraft limit and save high interest and monthly charges paid to credit card. The amount you were earlier paying to credit card can now be deposited in the overdraft account to save interest further.
Isn’t it interesting? If yes, here is the route to execute the plan: -
- First, a current account is opened with an overdraft facility up to the value of borrowing limit set for the account with a bank or NBFC like Bajaj Finance.
- Then the investor must fill up the application form for marking a lien providing the details like folio number, scheme name, plan, option and the number of units.
- Once the documents are received, these are forwarded to the mutual fund registrar for lien marking i.e., to mark a lien on the number of units being pledged.
-
The registrar then marks the lien and sends a letter to the lender with a copy to the borrower confirming the lien.
All these formalities are done by the bank executive so you just need to provide the necessary documents and relax.
Benefits of Overdraft facility against mutual funds: -
- The interest rates for a loan against mutual funds are generally lower than that for personal loan interest rate.
- Investor has full freedom to manage the credit balance so as to minimize the interest cost.
- It is a good way to receive instant liquidity against your investment in mutual funds.
- Though one cannot redeem the units of the fund under lien, but the dividend and value is continuously earned on these funds.
So, the overdraft facility against mutual funds is a very efficient technique to get out of the burden of heavy EMIs and to save interest but it is a rare practice due to lack of awareness and information on the subject.
You are now one of those rare people who know this technique. So, give it a thought and bid a beautiful bye to your EMIs.
To know more and to discuss how this facility can help you pay your loans early and save on high interest costs, you may mail us at info@investguru.in or speak to us @ 9910423232.
We wish you Happy Investing!
CA Taneesha Bansal
Research Analyst, Investguru