Quick access to funds

One of the primary benefits of taking a loan against your mutual fund investments is the speed at which you can access funds. Since your investments act as collateral, the approval process is usually faster than for a traditional loan.

No need to liquidate your investments

When you opt for a loan against your mutual fund units, you do not have to sell your investments. This means you can continue to benefit from any potential market growth and dividends. By retaining your investments, you avoid missing out on future gains while still meeting your immediate financial needs.

Avoidance of capital gains tax

Selling mutual fund units may trigger a capital gains tax, especially if your investments have appreciated in value. With a loan against mutual funds, you are not selling any assets, so there is no tax liability on the sale.

Generally lower interest rates

Loans secured by collateral, such as mutual fund investments, typically come with lower interest rates compared to unsecured loans. Because the lender’s risk is minimized by having your assets as security, they can offer better interest terms, reducing your overall cost of borrowing.

Retaining market exposure

By choosing to take a loan against your mutual funds instead of selling them, you continue to participate in market movements. So, if the market rises, your mutual fund investments will appreciate too. In case you are a long-term investor, who believes in the sustained growth of their portfolio, then this is the way to go.

Limited loan amount

The amount you can borrow is directly linked to the value of your mutual fund investments and the lender’s policies. Typically, lenders offer a percentage of your portfolio’s current market value, which means you may not be able to access the full value of your investments as cash. This limitation could affect how you plan to use the funds, especially if you have a significant need.

Interest and additional costs

Even though interest rates on secured loans are generally lower, you will still incur interest costs on the borrowed amount. Over time, these interest payments can add up, especially if the loan tenure is long. Additionally, there might be processing fees, administrative charges, or other costs associated with taking out the loan, which can increase your overall financial burden.

Risk of losing your investments

While taking a loan against your mutual funds means you do not sell them immediately, the loan is still secured by your assets. If you default on the loan or fail to meet repayment obligations, the lender has the right to liquidate your mutual fund units to recover the borrowed amount and you could possibly lose your investments.

Market volatility concerns

Mutual funds are subject to market risks – the line that comes in every advertisement and brochure. But the fact is this – if the market experiences a downturn, the value of your pledged mutual funds could drop significantly. Lenders might then require you to provide additional collateral or repay a portion of the loan to maintain the loan-to-value ratio. This requirement, often known as a margin call, can put additional pressure on your finances, especially during market slumps.

Impact on future liquidity

Using your mutual funds as collateral can limit your ability to access funds in the future. If another emergency arises or a better investment opportunity comes along, you might find that your assets are already pledged and then you might need to look for other sources.