Loan Against Mutual Fund vs Redeeming MF Units? Which is Better
When financial needs arise, mutual fund investors often face a dilemma between redeeming their investments or opting for a loan against mutual funds (LAMF). While redemption provides immediate liquidity, it can disrupt long-term financial goals. On the other hand, taking a loan on mutual fund holdings offers a more strategic alternative, especially for investors who want to retain their market exposure. This article explores loans against mutual funds vs. redemption in detail and compares them to help you make an informed decision.
What is Loan Against Mutual Funds?
A loan against mutual fund is a form of secured borrowing where you pledge your mutual fund units as collateral to avail a loan. The pledged units remain in your portfolio, and you continue to earn returns on them. The process of availing a loan against mutual funds online is quick and convenient. smallcase offers an instant loan against mutual funds, allowing borrowers to access funds in a matter of hours.
What is Redemption?
Redemption refers to the process of selling your mutual fund units back to the fund house. Upon redemption, the fund house pays you the current value of your investment (based on the NAV on the day of processing). It is a straightforward way to liquidate your mutual fund holdings for immediate cash requirements. However, redemption may have financial implications such as exit loads, capital gains tax, and the opportunity cost of losing potential future returns.
Key Differences Between Redemption and LAMF
| Aspect | Loan Against Mutual Funds | Redemption |
| Ownership of Units | Remains with the investor | Units are sold and removed from the portfolio |
| Return Continuity | Returns continue to accrue | Returns stop as units are liquidated |
| Processing Time | The loan amount gets disbursed two working hours after approval | Usually takes 1-3 business days |
| Cost | Interest on the loan; no loss of returns | Exit loads and tax; potential loss of future growth |
| Purpose | Temporary liquidity without disturbing investments | Permanent exit from the investment |
The decision between loan against mutual fund vs redemption depends on urgency, investment horizon, and financial planning.
Why is Loan Against Mutual Funds a Good Option Compared to Other Loans?
Compared to personal loans or credit card debt, a loan on mutual funds holdings offers several advantages:
- Lower Interest Rates: Since it’s a secured loan, interest rates are often lower than unsecured personal loans or credit cards. At smallcase the loan against mutual funds interest rate is 10.5% – 10.9% per annum.
- No Credit Score Dependency: smallcase does not consider credit score under the eligibility criteria.
- Flexible Repayment Options: Borrowers can repay the interest each month, and the principal can be repaid anytime. Additionally, there are no prepayment or foreclosure charges.
- Quick Disbursal: At smallcase, you will receive your loan amount within two working hours after the approval of your application.
- Preservation of Long-Term Goals: Unlike redemption, taking a loan allows your investments to stay intact and continue to grow.
This makes it a prudent short-term liquidity tool for investors with medium to long-term financial objectives. Read more about the benefits and features of LAMF here.
Use Case Scenarios: Loan Against Mutual Funds vs Redemption
Understanding when to use a loan against mutual funds and when to redeem is key to smart financial decision-making.
Individuals Might Use a Loan Against Mutual Funds When:
- They face a temporary cash crunch but expect funds (like a bonus or invoice payment) shortly.
- They want to maintain investment continuity for long-term goals such as retirement, children’s education, or wealth building.
- They need immediate liquidity and prefer instant loan against mutual funds without disrupting their portfolio.
- They seek better interest rates than unsecured loans or credit cards.
Investors May Choose Redemption When:
- The investment objective has been met, or their financial goal is complete.
- They want to reallocate funds to a different asset class or rebalance their portfolio.
- Their mutual fund’s performance is declining, and they prefer to exit and reinvest elsewhere.
- They have no immediate means to repay a loan, making borrowing financially unviable.
Conclusion
Both loans against mutual funds and redemption serve different financial needs and goals. Today, with loan against mutual funds online platforms offering instant loan against mutual funds, access to credit is easier and more efficient than ever. By weighing the benefits and costs and understanding your own financial goals and cash flow, you can decide which route suits your situation better.
Ultimately, the choice between a loan against mutual fund vs redemption should align with your broader investment strategy and life goals, allowing you to meet your immediate financial needs without compromising your future.
All About Loan Against Securities & Loan Against Mutual Funds on smallcase –
smallcase offers quick and easy disbursement of loans against mutual funds ( LAMF). Explore all about the eligibility criteria, documents required, features, and benefits of a Loan against mutual funds on smallcase
Frequently Asked Questions About LAMF
If you need short-term liquidity and want to retain your investment growth, a loan against mutual funds is a more strategic option than redemption, which can trigger taxes and disrupt long-term goals.
Redemption may attract capital gains tax, whether it is short-term or long-term, depending on the holding period and the type of mutual fund.
No, taking a loan against a mutual fund is not considered a taxable event since you’re not selling the units.
With smallcase, loans against mutual funds can be processed within a few hours, making them a fast credit option.
Yes, smallcase charges ₹999 or 1% of the loan amount, whichever is higher, up to a maximum of ₹4,999.
