How Indian Investors Can Raise Funds Without Redeeming Their Investments
Over the last decade, mutual funds have grown into one of India’s most trusted wealth-building instruments. Whether it’s a disciplined monthly SIP or a lump-sum investment during a market correction, more and more Indians—especially working professionals in the 30–50 age group—are relying on mutual funds to secure their long-term goals.
But life doesn’t always wait for your investments to mature. A sudden home renovation, a child’s education expense, a business opportunity, or even a medical emergency can demand immediate liquidity. And here’s where many investors make the first misstep: they redeem their mutual fund investments.
While liquidating your MF units may seem like the easiest way out, it’s far from the smartest. As a financial expert who has worked with hundreds of clients over the past 20 years, I advise exploring another route—one that preserves your portfolio while meeting your short-term needs: pledging your mutual funds to access funds.
Why Not Redeem?
Selling your mutual fund units may bring quick cash, but it often comes at a cost. Not only do you interrupt the power of compounding, but you might also face exit loads, tax liabilities, and the emotional setback of pausing your financial progress. Equity mutual funds are susceptible to market timing, and redeeming during a downturn can lock in losses.
So, how do you obtain the funds you need while preserving your investments?
Introducing Loans Against Mutual Funds
Many Indian banks and NBFCs now offer a facility where you can pledge your mutual fund units as collateral and borrow against them, without having to redeem them. This is typically structured as an overdraft or term loan facility.
Let me give you a relatable example. Neha, a 42-year-old HR professional from Bengaluru, had built up a mutual fund portfolio worth ₹10 lakhs over the years. When she needed ₹3 lakhs for her sister’s wedding, she didn’t want to sell her equity funds. Instead, she applied for a loan on mutual fund through her bank’s digital platform. Her loan was approved within 4 hours, her funds remained invested, and she repaid the loan in six months—all without disturbing her long-term goal of retirement at 55.
Key Benefits of Leveraging Mutual Fund Holdings
- Retain Ownership
You continue to remain the investor and enjoy any gains your portfolio makes during the loan period.
- Lower Interest Rates
Because it’s a secured loan, the interest rate is significantly lower than that of a personal loan. Some NBFCs offer rates starting at 9.38% per annum, while public sector banks like SBI currently offer this facility at around 11.5% annually.
- Quick and Hassle-Free Processing
If your mutual funds are serviced by platforms like CAMS or KFinTech, the entire lien-marking process is often digital, requiring only your PAN, mobile number, and OTP authentication. However, investors should remain vigilant against Cybersecurity threats by always using secure networks and verifying official platform URLs before entering their PAN and OTP credentials.
- Pay for What You Use
In overdraft-style facilities, you’re charged interest only on the amount you draw, not the total limit sanctioned.
How Much Can You Borrow?
The amount depends on your mutual fund type. Generally:
- Up to 50% of the equity mutual fund value
- Up to 70% of the debt mutual fund value
The actual eligible amount may vary slightly across lenders and fund houses.
Points to Keep in Mind
- Market Movement: If the NAV of your pledged funds drops significantly, your lender might ask for a top-up or partial repayment.
- Loan Tenure: These are usually short- to medium-term loans, often with a 1-year tenure and the option to renew.
- Charges: Some lenders impose documentation charges or lien marking fees. Always check the fine print.
- Repayment Discipline: Failure to repay can lead to the lender liquidating your pledged units. So treat this as a responsible form of credit.
When Is It a Good Fit?
Taking a loan on a mutual fund is most suitable when:
- You need funds urgently but expect cash inflow soon (e.g., bonus, maturity, business revenue).
- You don’t want to disturb your long-term compounding.
- You’re looking for a lower-cost borrowing option compared to a personal loan or credit card.
Rather than breaking your investments in times of need, consider unlocking their value while preserving your future goals. A loan on a mutual fund offers a balance between liquidity and long-term growth—a win-win for today’s forward-thinking professionals.
