Why loans against mutual funds are gaining in popularity

Loan against mutual funds allow borrowers to access loans without having to liquidate their assets

In recent years, mutual funds have emerged as one of the mainstays of the Indian investment landscape. By offering diversification while delivering higher returns, mutual funds have increasingly become a preferred mode of investment.

Mutual funds can also be used as collateral in order to avail of loans,  if the need arises. This is an additional reason for its popularity, which is much touted by BFSI players. In the backdrop of restrictions on banks regarding  unsecured loans that require no collateral, loans against mutual funds have emerged as a game-changer, offering borrowers instant financial assistance without having to liquidate their investments.

Loans against mutual funds (LAMF) allow investors to keep their investment portfolio intact, a crucial factor in the long-term, or in situations where  specific investments have sentimental value (and hence, need not be liquidated). Furthermore, for investors depending on MFs to accomplish their future goals,  a LAMF gives the opportunity to avoid early redemption.

Typically ranging from 9-11 percent, LAMFs offer attractive interest rates which are much lower than those for personal or credit card loans. Lower interest rates translate into substantial savings, making LAMFs a viable choice.

Further, the entry of NBFCs and fintechs in the lending space has made loan approval a swift and hassle-free process, reducing the waiting time for funds.

Loans against mutual funds carry the essence of an overdraft facility, mimicking it in terms of functionality. LAMF lenders also waive foreclosure fees and penalties, enhancing borrower convenience. Additionally, in the absence of stringent repayment schedules, borrowers have the flexibility to tailor repayment schedules per their convenience.

As LAMFs allow borrowers to access loans without having to liquidate their assets, they do not trigger any capital gains taxes that may occur in case of redemption. Thus,  loans against mutual funds also allow borrowers to maximise their returns while maintaining a lower tax liability.

With attractive interest rates, flexible repayments, and quick approvals, LAMFs are a compelling option for borrowers. However, before taking any financial decision, it’s essential to consult financial advisors, as the path towards financial well-being lies in aligning decisions with future goals.