Every investor has been in a situation where they have felt the need to utilize some of the money invested in mutual funds to address a financial need. The first thought that comes to mind is to redeem the mutual funds. However, people forget that they have to pay exit loads, capital gains tax, and they give up the power of compounding returns that the money would have generated. There is a far superior alternative to help meet a financial need without actually selling the mutual fund holdings, and that is a mutual fund loan.

How Does A Loan Against Mutual Funds Work?

A loan against mutual funds operates in the same way as taking a property loan against real estate. Instead of the usual real estate documents, the investor’s folios are pledged as collateral with either CAMS or KFintech, and a credit line is sanctioned against a certain percentage of the market value of the mutual fund units. It should be kept in mind that the mutual fund folios continue to earn returns as they stay pledged and the credit line is active.

It can be seen that a loan against mutual funds addresses the very situation that redemption aims to address, but without undermining the wealth creation that the mutual fund would have accrued over time. The investor gets the much-needed liquidity and meets the financial need while keeping the folios pledged until the time the credit line is closed.

A Superior Alternative To Personal Loans

Searching the web for a ‘loan on MF’ is a smart move for an investor who realizes the dual use of their existing mutual fund holdings as both an investment and collateral for a personal loan. Mutual fund-backed credit facilities are far more efficient than personal loans, with higher interest rates and fixed monthly repayments no matter what the utilization of the sanctioned amount is. Loans against mutual funds carry interest rates that are far lower than most personal loan EMI calculators would show.

Whenever there is a need for instant liquidity, but the investor cannot afford to part with their mutual fund earnings, the next best option is to take an instant loan against mutual funds. The money is sanctioned fast, no collateral is sold to reach the loan amount, and there are no additional costs involved over and above the interest due on the amount withdrawn.

Conclusion

A loan against mutual funds is the most practical way to meet liquidity needs without having to pay the steep redemption fees. With such a loan, the portfolio is kept intact: the wealth creation process is not interrupted, the power of compounding is not lost, and most importantly, the investor does not lose out on the twin advantages of a growth engine and a tax-saving instrument. The invested money brings its own benefits throughout the period of circulation, as evidenced by the fact that the loan has been repaid, the portfolio is conserved, and the investor has not lost a single unit of their long-term wealth.