What’s The Smart Financial Move: Loan Against Mutual Funds or Early Redemption?
In today's era, investors have shown increasing interest towards equity related investments such as shares and mutual funds instead of relying on traditional saving accounts or fixed deposits. Borrowing against mutual funds have emerged as an innovative solution. But why? Many of us envision dreams and set goals like purchasing property, plan for retirement, or fund a child's higher education. But investors tend to make untimely redemption of their investments due to sudden expenses’ such as home renovation, business expansion, etc. Loan against mutual funds enable investors to manage such expenses without giving up on their goals by protecting their investments.
What is Loan Against Mutual Funds?
A loan against mutual funds is a type of secured loan where an individual can borrow money from a Bank or NBFC by pledging their mutual fund units as collateral. This allows the investor to leverage their existing investments without having to liquidate them.
Why should one avoid untimely redemption & go for loan against mutual funds?
The expected return on your equity mutual funds is more than the interest rate on a loan against mutual funds. For example, let's assume you have invested Rs. 8 lakhs in mutual funds and you want to renovate a home that will cost you around Rs. 3 lakhs. You aim to redeem mutual funds and aim to reinvest in 10 months with a SIP of ₹30,000 a month.
Instead of redeeming your mutual fund investment, you can opt for a loan against mutual funds. You can pledge your mutual fund units as collateral and obtain a loan of Rs. 3 lakhs (45% of the collateral value).
Let’s compare numbers in case of redemption vs retaining the investment (assuming you earn 10% CAGR on your mutual funds and for simplicity let’s consider returns are linear and each month you will outflow ₹30,000 either towards monthly SIP or towards LAS repayment).
| If 3 lacs reinvested via monthly SIP of ₹ 30,000 | |||
| Month | Est Returns Monthly % | Monthly Holding | Est Returns Monthly |
|---|---|---|---|
| January | 0.83% | 30,000 | - |
| February | 0.83% | 60,250 | 250 |
| March | 0.83% | 90,752 | 502 |
| April | 0.83% | 1,21,508 | 756 |
| May | 0.83% | 1,52,521 | 1,013 |
| June | 0.83% | 1,83,792 | 1,271 |
| July | 0.83% | 2,15,324 | 1,532 |
| August | 0.83% | 2,47,118 | 1,794 |
| September | 0.83% | 2,79,177 | 2,059 |
| October | 0.83% | 3,11,504 | 2,326 |
| After 10 Months | 11,504 | ||
| If investment retained & 3 lacs managed with LAS | ||||
| Month | Est Returns Monthly % | Monthly Holding | Est Returns Monthly | Interest Paid for LAS |
|---|---|---|---|---|
| January | 0.83% | 3,00,000 | - | 2,293 |
| February | 0.83% | 3,02,500 | 2,500 | 1,864 |
| March | 0.83% | 3,05,021 | 2,521 | 1,835 |
| April | 0.83% | 3,07,563 | 2,542 | 1,553 |
| May | 0.83% | 3,10,126 | 2,563 | 1,376 |
| June | 0.83% | 3,12,710 | 2,584 | 111 |
| July | 0.83% | 3,15,316 | 2,606 | 917 |
| August | 0.83% | 3,17,944 | 2,628 | 688 |
| September | 0.83% | 3,20,593 | 2,649 | 444 |
| October | 0.83% | 3,21,265 | 2,672 | 229 |
| After 10 Months | 23,265 | 11,310 | ||
So, by retaining your investments, you will have an additional income of INR 11,955/-.
If you earn less than 5% CAGR only then you will incur a loss whereas your interest paid is higher than returns earned. Returns may not be as linear as in the example. However, returns data has shown equity investments held for more than 5 years have generated wealth for investors.
So, we have tried to answer why someone should not redeem long-term investments for short-term needs. Now let’s see how we can take loan against mutual funds.
How can we take loan against mutual funds?
With Mirae Asset Financial Services, availing a loan against mutual fund units has never been more effortless. Through a seamless, end-to-end digital process, the traditional burden of physical paperwork is eliminated. The entire procedure can be completed in just 15 minutes.
Your loan account against mutual funds can be completed in just 15 mins and a loan against shares can be completed the same day without any branch visits, tons of documentation, and waiting for days.
| Step by Step Process | |
| Step-1 Register & Apply for Type of loan |
Sign-up and select the type of loan i.e loan against equity, mutual funds, loan against debt mutual funds and loan against shares |
| Step-2 Complete your KYC |
Complete one-time KYC using your PAN & Adhar details, Details can be fetched directly from Digilocker if your Adhar is linked with your mobile number. |
| Step-3 Pledge Securities Online |
You can pledge securities at RTA or NSDL, You can lien mark mutual funds across AMC's registered with both CAMS and KFintech. |
| Step-4 Verify Bank Account |
Verify your bank account via E-NACH, The bank account will be used to directly credit the withdrawal amount in your bank account, Interest payments will also be deducted directly from the bank account. |
| Step-5 E-sign Loan Agreement |
Read & sign loan agreement online |
| Your Loan Account is Ready | |
Thus, with a convenient application process, quick loan account creation and attractive rate of interest and features, a loan against mutual funds or shares with Mirae Asset Financial Services can be a great option to manage your short-term expense and continue to retain your investments and generate wealth in the long term.
Conclusion:
The current investment landscape is witnessing a growing preference for equity-related assets like shares and mutual funds, driven by the allure of potentially higher returns compared to traditional savings. However, unexpected expenses often prompt investors to prematurely cash out their investments, jeopardizing their long-term financial goals.
Loan against mutual funds enables individuals to secure a loan while using their mutual fund units as collateral. They provide liquidity without the need for liquidation, safeguarding investment growth potential. With a seamless digital and fast process, investors can swiftly manage short-term financial needs while continuing to work towards their long-term wealth-building objectives.