Loan Against Mutual Funds vs Redeeming Mutual Funds
You need ₹3 lakh. Your mutual fund portfolio has ₹8 lakh. Comparing mutual funds vs redemption loan options, the simplest choice feels obvious: redeem ₹3 lakh and use the money. No loan. No interest. It feels like just using your own money.
That instinct is exactly why most investors make the more expensive choice. Redemption feels free, but it comes with tax, an exit load, and permanently lost compounding. Those costs add up over the years in ways most people never calculate. So the real question is: should you redeem mutual funds or take a loan against them? Let’s read more in this blog.
Key Takeaways
- Redemption triggers LTCG tax at 12.5% on gains above ₹1.25 lakh, plus exit load on units under 1 year
- Redemption permanently removes units from compounding. That cost grows every year.
- LAMF charges 9–13% p.a.* in interest but keeps every unit invested
- LAMF is fully reversible. You repay, the lien lifts, and your portfolio is whole again.
- Redemption is permanent. The compounding on sold units never comes back.
What Does Redemption Actually Cost You?
Most investors only think about the ₹3 lakh they’re pulling out. The real cost has three layers:
Layer 1: Tax
Say your ₹8 lakh portfolio grew from ₹5.5 lakh invested. That’s ₹2.5 lakh in gains. When you redeem ₹3 lakh, you’re redeeming a proportional share of those gains. The gains portion above ₹1.25 lakh are subject to a 12.5% LTCG tax under Section 112A.
Approximate tax on a ₹3 lakh redemption from this portfolio: ~₹5,800
Layer 2: Exit load
If any of those units were purchased within the last 12 months (common for SIP investors), you pay a 1% exit load on those specific units. On ₹1 lakh worth of recent units, that’s ₹1,000.
Layer 3: Lost compounding
This is the cost nobody puts on paper. ₹3 lakh removed from a portfolio growing at 12% annually:
| Time After Redemption | What That ₹3 Lakh Would Have Been |
| 1 year | ₹3.36 lakh |
| 3 years | ₹4.21 lakh |
| 5 years | ₹5.29 lakh |
| 10 years | ₹9.32 lakh |
You didn’t just spend ₹3 lakh. Over 5 years, you gave up ₹2.29 lakh in future growth. Over 10 years, ₹6.32 lakh. That’s the invisible cost of redemption.
What Does LAMF Cost You for the Same ₹3 Lakh?
You pledge your ₹8 lakh portfolio (or a portion of it), take a ₹3 lakh overdraft, and repay when your cash flow recovers.
At 9.3% p.a.* on Liquify:
| Loan Duration | Interest Paid | Compounding Preserved |
| 3 months | ₹6,975 | ₹3 lakh stays invested |
| 6 months | ₹13,950 | ₹3 lakh stays invested |
| 12 months | ₹27,900 | ₹3 lakh stays invested |
Even at 12 months, you pay ₹27,900 in interest. Your ₹3 lakh stays invested and earns roughly ₹36,000 at 12% returns in that same year. The portfolio earned more than the interest cost. And every year after that, those ₹3 lakh in units keep compounding, which wouldn’t happen if you had redeemed.
Mutual Funds vs Redemption Loan: The 5-Year Impact
Investor A redeems ₹3 lakh
Pays ~₹6,800 in tax and exit load. Portfolio drops to ₹5 lakh. At 12% annual growth, the portfolio reaches ₹8.81 lakh in 5 years.
Investor B takes LAMF for ₹3 lakh, repays in 6 months
Pays ₹13,950 in interest + ₹999 processing fee. Portfolio stays at ₹8 lakh. At 12% annual growth, the portfolio reaches ₹14.10 lakh in 5 years.
| Investor A (Redeemed) | Investor B (LAMF) | |
| Cost paid | ~₹6,800 (tax + exit load) | ~₹14,949 (interest + fee) |
| Portfolio after 5 years | ₹8.81 lakh | ₹14.10 lakh |
| Portfolio after 10 years | ₹15.53 lakh | ₹24.86 lakh |
| Net difference after 10 years | — | ₹9.33 lakh more |
Investor B paid ₹8,000 more in upfront costs. Five years later, that decision preserved ₹5.29 lakh in portfolio value.
When Should You Actually Redeem?
Redemption makes sense in a few specific situations:
- Your annual gains are under ₹1.25 lakh. No LTCG tax applies. The tax cost is zero.
- The fund has consistently underperformed and you planned to exit anyway. Redemption clears both problems at once.
- You need the money for over 12 months. At some point, cumulative LAMF interest exceeds the compounding benefit. For needs beyond a year, a redemption or a term loan may be cheaper.
- Your portfolio is too small to pledge. If your holdings are under ₹50,000, LAMF isn’t available.
When Is LAMF the Better Choice?
- Your need is short-term (1–6 months), and your portfolio can cover the collateral
- Your portfolio has significant unrealised gains that would trigger LTCG tax on redemption
- You want your SIPs and compounding to continue uninterrupted
- You want a reversible decision. Repay the loan, and your portfolio is exactly where it was.
The question of whether to redeem mutual funds or take loan against them almost always favours LAMF for short-term needs. Redemption costs less on paper today. LAMF costs less in reality over time.