Why Loan Against Mutual Funds is the Easiest Way to Borrow

Why Loan Against Mutual Funds is Easiest way to Borrow?

Financial needs often come unannounced. Whether it’s paying medical bills, covering higher education fees, or handling urgent business expenses, the first instinct many people have is to dip into their savings or redeem their investments. While this provides quick access to cash, it often disrupts long-term financial planning and may even lead to losses if investments are withdrawn at the wrong time. Fortunately, there is a better option available for those who have invested in mutual funds taking a loan against mutual funds, which is a type of loan against securities.

This borrowing option has been steadily gaining popularity in India because of its convenience, speed, and cost-effectiveness. Unlike traditional loans, it gives you access to liquidity without disturbing your ongoing investments. In this article, let’s understand why a loan against mutual funds is considered the easiest way to borrow and how it can help you manage your financial needs effectively.

What is a Loan Against Mutual Funds?

A loan against mutual funds (LAMF) is a type of secured loan where you pledge your mutual fund units as collateral to a bank or financial institution. Instead of redeeming your investments, you continue to stay invested while unlocking funds to meet your short-term or emergency requirements.

The loan amount you receive usually depends on the value of your mutual fund portfolio. Financial institutions typically offer a loan-to-value (LTV) ratio of 50-70%, meaning if you have mutual funds worth ₹10 lakh, you may be able to borrow ₹5-7 lakh against them. The ownership of the funds remains with you, and they continue to grow in value while you use the borrowed money.

Why Loan Against Mutual Funds is the Easiest Borrowing Option

1. Quick Access to Funds

Unlike traditional loans that involve lengthy paperwork and time-consuming approval processes, loans against mutual funds are disbursed quickly. With digital lending platforms, you can pledge your mutual fund units online, and the loan amount is often credited to your account within a few hours. This makes it especially useful during emergencies when time is critical.

2. No Need to Break Investments

Redeeming mutual fund investments before the intended horizon can impact your long-term goals and result in capital gains tax. By opting for a loan against mutual funds, you get liquidity without disrupting your wealth creation journey. Your investments remain intact, and you continue to enjoy the benefits of compounding.

3. Lower Interest Rates Compared to Personal Loans

Personal loans are unsecured and often come with higher interest rates. In contrast, since a loan against mutual funds is secured, loan against mutual fund interest rate is comparatively lower. This makes it a more affordable way of borrowing for individuals who already have investments.

4. Flexible Repayment Options

Borrowers enjoy flexibility when it comes to repaying the loan. You can either choose to pay interest monthly while repaying the principal later or close the loan earlier if you have surplus funds. This flexibility allows you to manage your cash flow better without feeling the burden of a rigid repayment structure.

5. No End-Use Restrictions

The borrowed amount can be used for almost any purpose be it medical expenses, business needs, education, travel, or even consolidating other debts. Unlike some loans that come with end-use restrictions, a loan against mutual funds offers complete freedom in how you utilize the funds.

6. Minimal Documentation

One of the biggest reasons this loan is considered easy is the minimal documentation required. Since your mutual fund investments are already linked to your PAN and KYC details, lenders usually don’t ask for extensive paperwork. Most of the process is digital, which reduces the hassle of manual submission.

7. Overdraft Facility

Many lenders provide the option to use a loan against mutual funds as an overdraft facility. This means you only pay interest on the amount you actually withdraw from the sanctioned limit. For example, if you have a sanctioned limit of ₹5 lakh but use only ₹1 lakh, you pay interest only on that ₹1 lakh. This feature makes it highly cost-efficient.

Example to Understand Better

Imagine you have invested ₹8 lakh in equity and debt mutual funds. You suddenly need ₹3 lakh for a family medical emergency. Instead of redeeming your funds and disturbing your portfolio, you approach a financial institution.

They offer you up to 60% of your mutual fund value as a loan i.e., ₹4.8 lakh. You borrow only ₹3 lakh and continue to stay invested in your mutual funds. Over time, your investments keep growing in value, and once your financial situation stabilizes, you repay the loan. This way, you meet your urgent needs while also safeguarding your long-term wealth.

Key Benefits of Loan Against Mutual Funds

• Cost-effective borrowing compared to personal loans or credit cards.
• Preserves long-term investment goals by avoiding premature redemption.
• Simple process with minimal paperwork and quick approval.
• Flexibility to withdraw only what you need and repay at your convenience.
• Continued returns as your investments remain in the market.

Things to Keep in Mind

While a loan against mutual funds is convenient, there are some aspects you should be cautious about:

• Market Risk: The value of your pledged funds may fluctuate due to market conditions. If the value drops significantly, the lender may ask you to pledge more units or repay part of the loan.
  
• Interest Cost: Even though rates are lower than unsecured loans, you should still borrow responsibly and avoid taking a loan unless it’s genuinely required.
  
• Timely Repayment: Ensure you have a clear plan to repay the loan to avoid financial stress or the risk of your pledged funds being liquidated.
  

Who Should Consider a Loan Against Mutual Funds?

This option is ideal for individuals who:

• Need quick access to funds without disrupting their investment journey.
  
• Are looking for a short-term financial solution at a reasonable cost.
  
• Already have a well-diversified mutual fund portfolio.
  
• Want flexibility in repayment and fund usage.
  

For example, a business owner facing a temporary cash flow crunch or a salaried professional dealing with a sudden medical emergency can find this option very useful.

Final Thoughts

A loan against mutual funds is undoubtedly one of the easiest and smartest ways to borrow. It offers speed, affordability, and flexibility three things that make it stand out compared to other borrowing options. More importantly, it helps you address your short-term financial needs without hampering your long-term investment goals. Only rely on SEBI registered Mutual Funds to invest.

The next time you face an urgent financial requirement, instead of rushing to redeem your mutual funds or applying for a costly personal loan, consider leveraging your existing investments. With minimal hassle, quick processing, and continued wealth growth, a loan against mutual funds proves to be a reliable financial safety net.