I am looking at ELSS investment options but everyone suggests told to avoid dividend reinvestment option. Why is that?
ELSS funds offer both growth and dividend option but it is better to avoid the dividend reinvestment route. The reason that many people advise you against opting for a dividend reinvestment option is that ELSS considers each investment as a fresh one. So all dividend which is reinvested will come with a further lock in period of 3 years for each new investment. This can limit your flexibility at the time of redeeming your money from the fund after the mandatory 3 year lock in period.
An NBFC I frequent is offering loans on mutual funds. I thought only banks were allowed to offer loan on securities. Can a NBFC offer loan against mutual fund?
While almost all banks offer loan against mutual funds, as per the guidelines of the Reserve Bank of India non banking financial companies of NBFC’s with assets of more than Rs. 100 Crore can offer such a loan. Mutual fund loans are available for both equity and debt funds just like banks, the approved non banking financial companies also have a list of approved funds which they consider for loan
When you choose the dividend option for your Mutual Fund, you will receive dividends that are declared from time to time by the Mutual Fund. You will also have capital appreciation, if any, when you decide to sell the Mutual Fund. In case you choose the growth option, you will not receive any dividends but will get capital appreciation. You have to understand that the profits that the fund receives is distributed as dividends under the dividend option while it is retained within the fund in case of the growth option. Dividend reinvestment is when the dividend is declared and reinvested in the fund. So, the dividend will be reinvested at the Net Asset Value (NAV) of the Mutual Fund on the date the dividend is declared. This might not be a great thing because you cannot time this reinvestment. Also, in case of ELSS funds, every investment that you make will have a lock-in period of 3 years. So, it is best to go for either the growth or dividend option in case of ELSS.
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Mutual Funds are assets in your name, which can be used to get a loan from banks and financial institutions. Here is how it works. The investor applies to the bank for a loan against the Mutual Fund units they hold. The bank does its due diligence, which involves researching your Credit Score, assessing the value of your assets, and determining your loan amount eligibility.
The loan amount depends on the value of the Mutual Fund units to be used against the loan. Usually, the amount sanctioned for the loan is 60-70% of the value of the Mutual Fund units pledged at the time of approval.
Once the loan is sanctioned, the investor has to inform the registrar about the lien given to the bank for the loan extended. The details include the Mutual Fund name, the number of units pledged and the bank name. The bank then has a lien over the Mutual Fund units thus pledged. The lien is a right given to the financial institutions to sell and recover the loan amount in case the borrower defaults on the repayment. Obviously, when a lien is marked on the Mutual Fund units, the investor cannot sell them.
The investor has to repay the loan at the interest rate agreed upon within the loan tenure. Once the loan is repaid by the borrower, the lender has to inform the Mutual Fund company to remove the lien on the units. Once this happens, the investor is free to exercise the units held. The bank can also request the fund to remove the lien on a part of the Mutual Fund portfolio if the investor has repaid a certain amount of the loan. These units can then be sold in the market.
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