Should you redeem or take a loan against mutual funds to meet short-term goals?

Mutual fund retail investors must explore the options of pledging their units rather than redeeming it to meet their short-term or emergency fund requirements as staying invested for long terms beyond five years has been beneficial as per established data.

As per AMFI data, around 43% retail investors redeem equity mutual funds before two years and this percentage will be even higher between 3-5 years.

Since, long-term investment tenure is considered five years and above, early redemption below this period of investments goes against the grain of thought to generate sizable wealth.

Primary reasons for early redemption by retail investors are non-performance of a particular scheme, portfolio balancing for his or her monetary needs.

Unfortunately, we cannot do much about these two two points. However, if one needs money to cover for short-term expenses, then positively leveraging the mutual fund investments by availing loan instead of redeeming could be an option to explore.

Let us understand with some numbers why staying invested and availing a loan instead makes sense.

If you compare the 5-year rolling return vs the 2-year rolling return for the last 20 years of an index like NIFTY50, 30% of the times, investors saw a return of 12-15% for staying invested for 5 years. On the contrary, in only 9% cases, investors made between 12-15% returns for being invested for a two-year period while around 12% of the cases investors made negative returns when invested for the same period. Whereas only 0.13% of the time investors made a negative return when invested for a 5-year period.

Hence, by availing loan against mutual funds, an overdraft facility is provided, where one can withdraw required amount and repay back without any prepayment charges. The interest charged is only on the amount utilized and for the duration you utilize. If no amount is withdrawn, no interest is charged, a good way to have emergency funds available and also earn returns on investments. It provides you with below benefits:

  • Generates liquidity and allows to stay invested
  • Allows your investment to compound
  • Protects turning unrealized losses into realized losses
  • Protects from taxes, exit loads & other costs wrt to redemption
  • Economical when compared with unsecured loans & credit cards
  • Better repayment flexibility than unsecured loans & credit cards
  • Get money quicker compared to redeeming

Loan against mutual funds is now available digitally and also all the services of withdrawal, repayments, top-up or security withdrawals, loan closure, etc can now be done digitally.

Thus, if retail MF investors wants to generate wealth and are confident in mutual funds, they should stay invested for the long term to protect goals and take care of short-term money requirements by availing loans against mutual funds.

(Krishna Kanhaiya is Director & Chief Executive Officer (CEO) at Mirae Asset Financial Services (India))