A loan against mutual fund is a secured borrowing facility that allows investors to raise funds by pledging their mutual fund units as collateral. Instead of redeeming investments during a financial need, borrowers can access liquidity while keeping their units invested. This helps investors meet short-term cash requirements without disturbing long-term wealth goals.
What is a loan against mutual fund?
A loan against mutual fund is offered by banks and financial institutions by marking a lien on your mutual fund holdings. The borrower remains the owner of the units, but the lender holds the right over them until the loan is repaid. The loan amount is usually provided as a percentage of the fund value, with higher eligibility for debt funds and slightly lower eligibility for equity funds due to market volatility.
How to take loan against mutual fund properly
To understand how to take loan against mutual fund without impacting your investments, start by checking whether your mutual fund units are eligible. Most lenders accept selected schemes, especially liquid and debt-oriented funds. The process is largely digital, where units are pledged through the registrar platform. Once pledged, lenders approve a credit limit and disburse funds as an overdraft or short-term loan, while the invested units continue to generate returns until the loan is repaid.
How investments remain unaffected
The key advantage is that you do not sell your mutual funds. This means you avoid exit loads, capital gains taxation triggered by redemption, and disruption of long-term compounding. Your portfolio stays active, while the loan provides liquidity against its value.
However, borrowers must ensure timely interest payments. If the fund value declines sharply, lenders may require additional collateral or partial repayment.
Interest rate and cost considerations
Interest rates on loans against mutual funds are usually lower than unsecured loans. Debt funds generally attract lower rates compared to equity funds. Borrowers should also review processing fees, maintenance charges, and whether interest is charged only on the utilised amount.
Best practices for borrowers
Borrowers should take only the required amount, prefer overdraft structures for flexibility, and repay early when possible. It is also important to choose stable funds as collateral to reduce margin risk.
Conclusion
A loan against mutual fund is an efficient way to access short-term funds without redeeming investments. By pledging eligible mutual fund units, borrowers can maintain portfolio growth while meeting liquidity needs. Careful repayment planning and understanding interest costs ensure that investments remain largely unaffected.
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