Selling mutual fund units to cover a short-term cash need breaks a long-term investment plan and can trigger tax on gains you weren't planning to book yet. A loan against mutual funds is built for exactly this situation, and it's worth understanding before you reach for a redemption instead.

What a loan against mutual funds actually is

Instead of selling your units, you pledge them as collateral with a lender and borrow against their value. The units stay invested and continue to grow (or fall) with the market while the loan is outstanding. This is different from a personal loan in one key way: the interest rate is usually lower because the lender holds security against the loan, rather than lending unsecured.

Where this fits compared to other borrowing options

A personal loan doesn't require collateral but usually carries a higher interest rate. A loan against property takes longer to process and ties up a larger asset for what might be a short-term need. A loan against mutual funds sits between the two: faster to arrange than a property-backed loan, and typically cheaper than an unsecured personal loan, provided your fund holdings are eligible as collateral.

What determines how much you can borrow

Lenders set a loan-to-value ratio based on the type of fund pledged. Equity funds usually get a lower LTV than debt funds, because equity values swing more. If the market value of your pledged units drops significantly, you may be asked to pledge more units or repay part of the loan to maintain the required margin, so this isn't a source of funds to lean on if you can't absorb that kind of margin call.

Questions worth asking before applying

Ask what happens if your fund value drops below the required margin, whether there are foreclosure charges for early repayment, and how quickly units are released once the loan is closed. These terms vary between lenders, and a consultant who works with multiple loan-against-mutual-fund products can walk you through how they compare for your specific fund holdings.

When this isn't the right tool

If you don't expect to repay within a reasonably short period, or if the interest cost on the loan is likely to exceed what your pledged funds are earning, redeeming instead may work out better despite the tax impact. This is a case-by-case calculation, not a rule of thumb, and depends on your specific holdings and timeline. For a look at whether this fits your situation, see the loan against mutual funds service or book a consultation to go through your fund portfolio in detail.

This is general information, not investment or tax advice specific to your situation. Loan terms and eligibility vary by lender and fund type.