Emergencies often demand quick access to funds, and liquidating investments might seem like the only solution. However, there’s a better option: a loan against mutual funds. This financial product allows you to meet urgent financial needs without disrupting your investment growth.
In this article, we’ll delve into the top 5 reasons why a loan against mutual funds is a smart choice during emergencies. We’ll include practical Indian examples, explain the process, and highlight its benefits. For more such financial insights, visit RichPath.in—your go-to platform for investment tips and strategies.
What Is a Loan Against Mutual Funds?
A loan against mutual funds (LAMF) is a secured loan where your mutual fund units are pledged as collateral. Banks, NBFCs, and fintech platforms offer this facility with minimal paperwork and quick processing.
Why Choose a Loan Against Mutual Funds?
Here are the top 5 reasons why opting for a loan against mutual funds during emergencies makes sense:
1. Quick Access to Funds
Emergencies require immediate financial solutions. Loans against mutual funds are processed quickly, often within 24 to 48 hours.
How It Works
- Apply online or offline with minimal documentation.
- The lender marks a lien on your pledged mutual fund units.
- Once approved, the loan amount is credited to your account.
Example:
Anita, a teacher from Mumbai, faced an unexpected medical emergency. She secured a ₹2 lakh loan against her mutual fund portfolio within 36 hours, avoiding the hassle of liquidating her investments.
2. Lower Interest Rates
Unlike personal loans, which are unsecured and carry higher interest rates (12%-24%), loans against mutual funds are secured. The interest rates are typically lower, ranging between 8% and 13% per annum.
Why It Matters
- Lower interest rates reduce the overall cost of borrowing.
- Ideal for short-term financial needs.
Example:
Rajesh from Bengaluru compared a personal loan and a loan against his mutual funds. The latter offered him a 9% interest rate, saving him ₹15,000 in interest costs over a one-year tenure.
3. Preserve Your Investments
Liquidating mutual funds during market lows can result in losses. With a loan, you can meet your financial needs while retaining your investments, allowing them to grow over time.
Key Benefits
- Avoids capital gains tax on premature withdrawals.
- Retains the compounding benefits of long-term investments.
Example:
Seema, an entrepreneur from Delhi, used a loan against her mutual funds to fund her business expansion. Over the loan tenure, her portfolio grew by 12%, which she would have missed out on had she liquidated it.
4. Flexible Loan-to-Value Ratio
The loan-to-value ratio (LTV) for mutual fund loans ranges from 50% to 70%, depending on the fund type. This flexibility allows you to borrow only what you need, avoiding over-borrowing.
How It Helps
- Provides tailored solutions for small or large financial needs.
- You can pledge only a portion of your portfolio if required.
Example:
Suresh, a small business owner in Chennai, pledged mutual funds worth ₹5 lakh to secure a ₹2.5 lakh loan, covering a short-term cash flow crunch without risking his entire portfolio.
5. No Impact on Credit Score
Since the loan is secured against your mutual funds, it doesn’t heavily rely on your credit score for approval. This makes it accessible even for those with average credit histories.
Additional Perks
- As long as you repay on time, your credit score remains unaffected.
- Ideal for individuals building their credit history.
Example:
Manish, a freelancer from Jaipur, used his equity mutual fund investments to secure a ₹1 lakh loan. Despite having a limited credit history, his application was approved without complications.
How to Apply for a Loan Against Mutual Funds
- Check Eligibility: Ensure your mutual fund schemes qualify for a loan.
- Choose a Lender: Compare interest rates and terms from banks, NBFCs, and fintech platforms.
- Submit Documents: Basic KYC documents, mutual fund portfolio statement, and lien marking form.
- Lien Marking: The lender marks a lien on your pledged units, restricting redemptions.
- Loan Disbursal: Receive funds within 1-2 business days after approval.
Key Considerations
- Type of Mutual Funds: Debt funds and equity funds are eligible, but ELSS funds are excluded due to their lock-in period.
- Repayment Tenure: Typically ranges from 6 months to 3 years, depending on the lender.
- Processing Fees: Usually 0.5%-1% of the loan amount.
When Should You Avoid a Loan Against Mutual Funds?
- Long-Term Investments: Avoid if the pledged units are critical for achieving long-term goals.
- Over-Borrowing: Borrow only what you can comfortably repay to avoid default.
Practical Indian Scenarios
Case 1: Medical Emergency
Ravi, a Hyderabad-based engineer, used his mutual funds to secure a ₹3 lakh loan for urgent medical treatment. His portfolio remained intact, and he repaid the loan within a year.
Case 2: Education Expenses[Loan Against Mutual Funds]
Pooja, a single mother from Pune, used a ₹5 lakh loan against her mutual funds to pay for her son’s overseas education. She benefited from a lower interest rate compared to an education loan.
Conclusion
A loan against mutual funds is an excellent financial tool for emergencies, providing quick access to funds without compromising your investments. Its lower interest rates, flexibility, and minimal documentation make it a preferred choice over personal loans.
For expert financial insights, visit Rich Path. and start your investment journey today! 🚀
Read more –
Top 5 Mutual Funds for Long-Term Growth in India in 2025
Best Mutual Funds: How to Choose – A Complete Guide
Best Flexi Cap Mutual Funds to Invest in 2025
Did this article help you? Like, share, and comment below to let us know your thoughts or suggest topics you’d like us to cover!
