Source/Contribution by : NJ Publications
We advisors, put in countless efforts in acquiring a client, and have him/her invest for his/her goals, while creating a source of income for ourselves in the form of commissions that we receive on the investment.
However, one of the biggest challenges we all face unanimously over our advisory careers is, premature withdrawals by investors. After all the backbreaking, one fine day, the investor wants to break the investment for he is in urgent need of money. This can be for various reasons, like the down payment requirement for buying a house, or for kids education like admission fee, business loss, working capital required for business, etc. You try to explain to the investor the need to retain the investment, but mostly you have no option but to cave in.
When the investor needs money, in absence of an emergency fund, or when the fund is not adequate, he has two options to provide for the need:
1. Take a Loan; He can take a personal loan or may be borrow on his credit card, but these options are expensive, the borrower has to pay exorbitant interest rates that may even go upto 20% to 35%.
2. The other option is, he can sell off some of his assets, in this case, his mutual fund investment will mostly be his first choice to sacrifice.
When the investor goes by the second option, that is when he chooses to let go his Mutual Fund investment to meet his money need, following are the repercussions:
The client misses growth opportunity, there is a possibility that as soon as he withdraws, the markets pick the upturn and his investment is deprived of the growth that would have followed as a result of the market surge
The client doesn't achieve his goal, the sole purpose behind the entire financial planning process is defeated
Your efforts go in vain
You lose your future commissions on the investment
The episode turns out to be an unpleasant experience for both the advisor and the investor.
To bypass the above situation, there are two things you can do:
Whenever you get a new client onboard, advise him/her to create an adequate emergency fund, first thing, before any other investment. The dilemma can be avoided altogether. Having an Emergency Fund, will mostly not put the investor in a situation like above. He will have the money to his rescue, no borrowing at steep interest rates and no selling of investments either.
But in case, the need is more than the amount of the Emergency fund, then you have a backup plan for the investor which is a loan, and this loan doesn't come at a ripping cost of 20 or 30%, rather the interest rates are very nominal. And this option is, taking a loan against the Mutual Fund.
NJ offers a platform to the investors wherein they can get a loan against their investments like Mutual Funds, shares, RBI bonds, etc. Under the Loan Against Securities (LAS) facility, investor's assets/securities are pledged and loan is available at very competitive rates between 10-12%. Apart from the low interest rate, the interest is charged only on the amount drawn, like an overdraft. So if the loan sanctioned amount is Rs. 10 Lacs and at a particular point, the investor has drawn just Rs 3 lacs, so he will be paying interest on this Rs 3 Lacs only. Further, the processes of application and repayment is very quick, convenient and hassle free.
With the help of this loan, the investor can meet his urgent money need, while keeping his MF investment intact and thus his goals unaffected. Now having said that, sometimes what happens is, the investor needs money and he applies for redemption online, and you come to know only after the client has already placed the redemption request, and you don't even get an opportunity to explain to him, to counsel him about the aftermath of the redemption and apprise him of the alternate solutions.
Hence, it's ideal that you inform the client about the LAS facility, beforehand. Whenever the investor invests in a MF scheme, let him/her know that in case they need money for an emergency, they can take a loan against the investment without disturbing their goals.
So, to conclude, in times of need, taking a loan against the Mutual Fund is the best deal for both, the investor and the advisor. The investor gets to retain his investment as well as bridge the money gap at a very nominal cost, while the advisor ensures that his income flow is not disrupted, plus he also gets a commission on the loan that the investor takes.
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