When to borrow against FD One of the simplest loans to borrow is a fixed deposit (FD) loan. Already in the bank's kitty in the form of an FD, the loan is sanctioned in a jiffy, at times even in a matter of hours, without further documentation. The rate of interest is not more than 1-2% above your FD rate of interest, so it is one of the cheapest forms of borrowing. Your FD continues to earn interest for the tenure of the loan, however, the bank holds it until the loan is repaid.
2/5
How loan against mutual funds work You can pledge your debt fund or equity units and take a loan from banks or NBFCs against mutual funds. The advantage is that your investment is not accessed, and you do not trigger capital gains tax by way of redemptions. But the risk lies in market fluctuation: if your units lose value, your lender can ask for more collateral or even sell units to get dues. Interest rates are also slightly higher than against FDs, typically ranging from 9% to 12%.
3/5
Cost and convenience compared FD loans are smaller and more uniform in size due to the fact that the underlying deposit is non-market based. Mutual fund loans are more flexible with greater amounts feasible in terms of portfolio size. There is quicker processing for FD loans while MF loans could have valuation confirmation and approval. For short-term instant needs, FD loans are better; for higher borrowing without encashing long-term assets, mutual fund loans could be utilized.
4/5
The role that risk would have in your choice Risk is minimal with FD loans — your deposit is safe, and the cost is just that the bank will charge the amount of the loan against it in case of default. Mutual fund loans are more risky because market volatility can lower the market price of units pledged. Thus, MF loans would be for bold investors and FD loans for timid investors.
Long-term impact on returns While when you take a loan against FDs, your deposit grows step by step without you sacrificing growth, in case of mutual funds also, your units keep investing, though the volatility could have its impact on the terms of the loan as well as your overall return. The borrowers need to think if the short-term liquidity is worth the prospective impact on long-term generation of wealth.
