Loan Against Mutual Funds: A Cheaper Alternative for Investors Compared to Personal Loans
Growing Popularity Among Retail Investors
In recent times, taking loans against mutual fund (MF) investments has become an increasingly popular trend among retail investors. With growing awareness about the importance of long-term wealth creation, investors are now more inclined to retain their investments instead of redeeming them prematurely. Since loans against mutual funds come with lower interest rates than personal loans, many are opting for this option to meet short-term financial needs.
A Strategic Option During Market Downturns
In the current bearish market conditions, savvy investors are avoiding the liquidation of their mutual fund holdings. Instead, they are leveraging their investments to meet financial needs by opting for loans against them. This approach not only helps them secure funds at lower interest rates but also allows them to continue earning returns on their investments.
Lower Interest Rates Compared to Personal Loans
Loans secured against mutual fund holdings typically carry interest rates ranging from 8% to 15%, with most financial institutions offering rates around 10% to 11%. In contrast, personal loans usually come with higher interest rates, ranging from 13% to 20%, depending on the borrower’s risk profile.
Furthermore, personal loans often involve extensive documentation and a more complicated approval process. Loans against mutual funds, however, are quicker and easier to obtain, as they are granted based on the value of the investor’s existing MF holdings. Given this convenience and cost-effectiveness, many investors are choosing this route for short-term liquidity.
Additionally, mutual funds—especially equity-oriented ones—have historically delivered average returns of 14% to 15%, which often surpass the interest charged on these loans, resulting in a net financial gain for the investor.
Who Can Benefit the Most?
This loan facility is especially beneficial for investors who have been invested in mutual funds for over five years. Such investors may be eligible to borrow 50% to 80% of their investment value, depending on the type and performance of the mutual fund. Longer investment durations typically translate into higher loan eligibility and stronger average returns, reducing the effective cost of borrowing.
Even new investors can avail themselves of this facility by pledging their mutual fund units as collateral.
Overdraft Facility Option
Many lenders also offer an overdraft facility against mutual funds. Under this arrangement, a fixed credit limit is sanctioned, and interest is charged only on the amount utilized—not on the full approved limit. Borrowers enjoy the flexibility of repaying the amount as per their convenience. In some cases, lenders may also waive off early repayment charges, further enhancing the appeal of this loan option.
