Mutual Fund Loan Myths: The Honest Truth Behind Them
A loan against mutual funds is a lesser-known but practical financial option for many investors. Still, many misunderstandings surround it. Some think it’s risky, while others assume it’s hard to get. These common mutual fund loan myths often stop people from even considering it. In this blog, we’ll clear up these doubts—honestly and directly—so you can see the whole picture and make decisions with clarity.
What Is a Loan Against Mutual Funds?
Before we go into the myths, let’s get the basics right.
A loan against mutual funds is a kind of a secured loan. Here, your mutual fund units act as collateral. Instead of selling your investments during a financial crunch, you can use them to borrow money. The mutual funds stay invested, and you pay interest only on the amount you use.
Common Myths and the Truth Behind Them
1. “You Lose Ownership of Your Mutual Funds”
Not true. You still own your mutual funds. The lender just marks them as a lien, which means you can’t redeem or sell them until the loan is repaid. But they remain in your name. You also continue to earn returns.
2. “It Affects Your Credit Score Badly”
It doesn’t work like that. Taking a loan against mutual funds has no adverse effect on your credit score unless you default on repayments. In fact, if you repay it on time, it could help build your score.
3. “Only Big Investors Can Get This Loan”
This is a common one. You don’t need an extensive portfolio. Even retail investors with mutual fund holdings worth ₹1 lakh or more can apply. It’s more accessible than most people think.
4. “You Can’t Use SIPs as Collateral”
Not completely correct. SIPs (Systematic Investment Plans) themselves are not collateral, but the units purchased through SIPs can be used as collateral. So, if you’ve been investing regularly, you may already have eligible funds.
5. “Interest Rates Are Always Too High”
This depends on the lender. As the loan is secured, interest rates are often lower than those for personal loans. Rates may range from 9% to 11% per year.
6. “You Must Take the Full Loan Limit Offered”
There’s no requirement to use the entire approved limit. Instead, it can be used like an overdraft facility. The approved limit is based on the value of your mutual fund holdings, but you only pay interest on the amount you actually use.
Quick Comparison: Loan Against MF vs Personal Loan
| Feature | Loan Against Mutual Funds | Personal Loan |
| Collateral Required | Yes (MF Units) | No |
| Interest Rate | 9%–12% | 11%–24% |
| Processing Time | 1–2 days | 2–5 days |
| Ownership of Investment | Retained | Not applicable |
| Prepayment Charges | Usually Nil | Sometimes applicable |
| Ideal for | Short-term liquidity | Any unsecured needs |
A Few Things You Should Know Before Applying
- Types of Funds Accepted: Most lenders accept equity and hybrid mutual funds. Debt funds are accepted too, but policies may vary.
- Minimum Value Needed: Some banks require a minimum fund value (usually ₹50,000–₹1,00,000).
- Loan-to-Value Ratio (LTV): This means how much of your fund’s value you can borrow. Usually around 50%–70%.
- Disbursal Time: Once the lien is marked, funds are usually disbursed within 24–48 hours.
When Is It a Good Option?
Here are some practical situations when taking a loan against mutual funds makes sense:
- You need quick money for a short period, like a medical expense or sudden travel.
- You want to avoid liquidating your investments during a market dip.
- You are confident about your repayment ability and are looking for a more affordable alternative to a credit card or personal loan.
When You Might Want to Think Twice
This option is not for everyone. Suppose you don’t have a stable income or a clear repayment plan. Then, this type of loan can be risky. Moreover, in volatile markets, if the fund value drops sharply, lenders may ask you to top up your margin or partially repay the loan.
The Bottom Line!
A loan against mutual funds isn’t complicated. It’s just not widely understood. The myths we discussed above prevent people from considering a smart financial option that can help in real-life situations. If used wisely, this type of loan allows you to maintain your investments while addressing your cash needs.
However, you should consult your bank or financial advisor before applying. Ask about
- Charges
- Interest
- Tenure
- Repayment terms
Go in with all the facts, not assumptions.