Do you need short-term money? Loan against mutual funds is a quick and cheaper option
In the event of a serious emergency, fund needs may exceed the amount held in an emergency fund and one may be left with no choice but to either liquidate their investments or take out a loan.
However, abrupt unwinding of investments can interfere with meeting long-term financial goals, while borrowing involves interest payments. So you have to make an informed decision about whether to take out money that has been invested for long-term goals or take out a loan.
Liquidate investments vs. take out loans
The decision depends on the prospects for a return on an existing investment and the level of interest on the loan – in addition to the difficulty of obtaining a low-interest loan.
So if you have a debt-linked mutual fund (MF) with an average CAGR of about 5 percent, it’s better to pay it off than take out a loan at 10 percent interest.
On the other hand, if you have an equity-focused MF program that has the prospect of generating a CAGR 15 percent return over the long term, you would be better off taking out a loan at 10 percent interest rather than paying back the fund.
Find a cheaper loan
Unsecured loans – like personal loans – are expensive compared to secured loans – like home loans, car loans, securities loans, etc.
Because home loans and car loans cannot be used for any purpose other than buying a home or vehicle, a stock loan is the best option for borrowing money to meet needs during an emergency.
With a diversified portfolio and the prospect of higher long-term returns, equity-focused MF programs are one of the best options, with financial institutions generally willing to lend against them at an attractive interest rate.
In addition, your investments continue uninterrupted through the Systematic Investment Plan (SIP) even after taking out a loan under the MF program.
How to avail loans against MF
When investing online, you can avail paperless loans against the MF entities almost instantly with prior approval. For physical investments, loan approvals may take a little longer as there should be a loan agreement with the lender/bank.
However, you must pledge your MF Units as collateral in order to draw down the loan, which would create a lien on the units pledged for this purpose.
The lien is not lifted until the loan has been repaid. If the loan is partially repaid, you can request a partial lifting of the lien.