Need short term money? Mutual fund loan is a quick and cheaper option
In a severe event, the need for funds may exceed the amount kept in an emergency fund and there may be no choice left but to liquidate one’s investments or take out a loan.
However, the sudden liquidation of investments can derail the achievement of long-term financial goals, while taking out a loan involves interest payments. An informed decision must therefore be made on whether to withdraw the money invested for long-term goals or to take out a loan.
Liquidation of investments vs borrowings
The decision will depend on the prospect of gain from an existing investment, vis-à-vis the interest rate payable on a loan – apart from the fact that one may encounter difficulty in benefiting from a loan at low interest rate.
So, if you have a debt-focused mutual fund (MF) plan yielding an average CAGR of around 5%, it will be better to redeem it than take out a loan at 10% interest.
On the other hand, if you have an equity-focused MF system with the prospect of yielding a 15% CAGR return over the long term, it would be better to take out a loan at 10% interest rather than redeem the funds.
Find a cheaper loan
Unsecured loans – like personal loans – are expensive compared to secured loans – like home loan, car loan, title loan, etc.
Since home loans and car loans cannot be used for any purpose other than buying a home and a vehicle respectively, a title loan is the best option for borrowing money to meet emergency needs.
With a diversified portfolio and the prospect of generating a higher long-term return, equity-focused MF schemes are one of the best options, against which financial institutions usually lend at an attractive rate.
Additionally, your investments through the Systematic Investment Plan (SIP) will continue uninterrupted even after you take out a loan against the MF Program.
How to avail loans against MF
If you make investments online, you can avail paperless loans against MF units almost instantly with pre-approval. In the case of physical investments, loan sanctioning may take a little longer, as a loan agreement with the financier/bank must be in place.
However, you must pledge your MF units as collateral to qualify for the loan, which would create a lien on the units pledged for this purpose.
The privilege will only be removed once the loan has been repaid. You can request the partial lifting of the privilege, in the event of partial repayment of the loan.