If you’ve been investing in mutual funds for a while, you probably see them as long-term wealth builders. And rightly so. SIPs, lumpsum investments, and diversification strategies are all tailored to help you grow your wealth steadily over time.
But what many investors don’t realize is that their mutual fund portfolio can also serve as a source of liquidity, without selling their units or disturbing their long-term financial plans. In moments of financial crunch, people often rush to redeem their
mutual fund investments, sometimes prematurely and at a loss. This knee-jerk reaction can derail the purpose of investing altogether.
But there’s another path quieter and less talked about. It’s called borrowing against your mutual fund units. Let’s unpack this lesser-known aspect of mutual funds and why it might be worth considering when you need cash, but don’t want to exit your investments.
The Usual Approach to Liquidity: Redemption
When life throws an unexpected financial challenge like a medical emergency, house repair, a business slowdown the common impulse is to liquidate investments. Mutual funds, especially debt and liquid funds, are often the first to go due to their ease of
withdrawal. But this approach comes with downsides.
First, there’s the possibility of an exit load depending on how long you’ve held the investment. Second, you may trigger capital gains tax. But more importantly, you lose out on compounding. Once you redeem those units, your investment corpus reduces, and
with it, the future growth potential.
This is why it’s important to understand that liquidity and redemption are not the same thing. Liquidity means access to money; redemption is just one way to get it. Borrowing against your mutual fund units is another.
The Alternative: Pledging Mutual Fund Units
Few investors know this, but many banks and NBFCs allow you to pledge mutual fund units to get a short-term loan. This works similarly to a
loan against securities or insurance policy. The institution evaluates your mutual fund portfolio and offers a line of credit or a term loan based on its market value.
You continue to remain the owner of the mutual fund units. They are merely pledged, not sold. This means your investments continue to generate returns (NAV appreciation and dividends, if applicable) even while they’re serving as collateral.
It’s a smart way to unlock liquidity without giving up ownership.
How It Works
The process is fairly straightforward, especially in today’s digital age. You typically need to:
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Submit an application to the lender with details of your mutual fund holdings.
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The lender will evaluate the portfolio generally, only units in demat or folio form, and from approved AMCs are considered.
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Once approved, a lien is marked on the pledged units. This means you can’t sell or redeem them without the lender’s permission during the loan period.
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Based on the market value and risk profile of your holdings, a loan amount is sanctioned. This usually ranges from 50% to 80% of the portfolio value, depending on whether the funds are debt, equity, or hybrid.
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The loan is disbursed, often into your account within 24-48 hours.
What’s important is that the underlying mutual fund units continue to be yours. As soon as the loan is repaid, the lien is removed, and your investments are free again.
When Is This Option Useful?
This hidden liquidity option is best suited for short-term or temporary cash needs where selling your investments would be counterproductive. Some common scenarios:
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Emergency medical bills
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Short-term working capital for business
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Paying fees or making a down payment
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Managing a cash flow gap due to delayed payments
In such situations, instead of breaking long-term investments or resorting to high-interest personal loans or credit cards, pledging mutual funds offers a more financially sound alternative.
What You Should Consider
Of course, this option isn’t without its nuances. Here are a few key points to keep in mind before deciding to borrow against your mutual funds:
1. Interest Rate and Charges
While this kind of loan typically comes at a lower interest rate than unsecured loans like personal loans or credit cards, it still attracts interest. Also, look out for processing fees, renewal charges, and prepayment conditions.
2. LTV Ratio
The Loan-to-Value (LTV) ratio determines how much you can borrow against the value of your funds. Equity funds generally have lower LTV ratios due to their market volatility. Debt and liquid funds may offer higher ratios.
3. Market Risk
Even though you aren’t selling your mutual funds, your portfolio is still subject to market fluctuations. If the value of your pledged funds drops significantly, the lender may ask you to pledge additional units or repay part of the loan in a process called
“margin call.”
4. Tenure and Repayment Flexibility
Some loans are structured as overdraft facilities, meaning you only pay interest on the amount used. Others are fixed-term loans with regular EMIs. Choose the structure that best matches your cash flow.
5. Impact on Long-Term Goals
This strategy only works well when you’re disciplined. Borrowing against your portfolio should not become a habit. Use it as a bridge, not a substitute for long-term financial planning.
Why It Remains Under the Radar
The idea of pledging mutual fund units hasn’t caught on widely in India yet. One reason is a lack of awareness. Most investors think of mutual funds only in terms of investment, not as leverage.
Another reason is a psychological one. The word “loan” still carries a stigma for many people, especially when it involves personal investments.
But when managed prudently, borrowing against your assets is a sign of financial maturity, not distress. It reflects an understanding that wealth is not just about what you own, but how efficiently you can use it when the need arises.
Conclusion
Your mutual fund portfolio can be more than just a long-term wealth creation tool. It can also be a source of liquidity in times of need, without forcing you to abandon your financial goals or erode your investments.
This isn’t about chasing debt or complicating your finances.
It’s about being aware of the tools available to you as an investor and using them strategically when the time is right. So the next time you’re short on cash, pause before rushing to redeem. Your portfolio might already hold the solution you just need to
unlock it.
