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Retail investors using Mutual Fund units as collateral for short-term loans

By opting for a loan instead of redeeming your mutual fund units, you can continue to benefit from potential market appreciation and compound growth.

Mutual funds, equity mutual funds

Illustration: Binay Sinha

Ayush Mishra New Delhi

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A growing trend among retail investors in India shows they are increasingly using their mutual fund units as collateral for short-term loans, rather than liquidating their investments. This strategy allows investors to meet immediate financial needs while preserving their long-term investment goals.
 
What is loan against mutual funds
 
A loan against mutual funds is a secured loan where mutual fund units are pledged as collateral.
The borrower continues to earn returns on the pledged units while gaining access to funds. This facility is offered by many banks and Non-Banking Financial Companies (NBFCs), making it a convenient choice for those in need of quick funds.
 
 
The mutual fund industry in India has seen substantial growth, with Assets Under Management (AUM) from individual investors reaching Rs 34.5 lakh crore. Individual investors contribute 88 per cent towards equity-oriented schemes. However, only 59 per cent of their equity investments are held for more than 24 months, indicating a tendency to redeem funds prematurely when liquidity is needed.

Loans against mutual funds provide investors a more efficient method to access liquidity while maintaining their investments for long-term objectives.
According to Mirae Asset Financial Services, the primary reasons retail investors choose loans against mutual funds and shares include business expenses (approximately 30%), home or office renovations (around 19%), and bill payments and school or college fees (about 18%). Additional common reasons are wedding expenses, refinancing, and travel.
 
Krishna Kanhaiya, CEO of Mirae Asset Financial Services, explains the rationale behind this trend.

“The NIFTY 50 index has delivered approximately 14 per cent CAGR over the last five years and around 12 per cent CAGR over the last decade. This demonstrates that long-term returns on investments typically exceed the cost of borrowing for short-term needs.”
Why people are taking loan against mutual funds

Loans against mutual funds offer a more efficient alternative to liquidation. The process of pledging mutual fund units is seamless, without the hassles associated with physical collateral like gold or real estate. Additionally, these loans often come with more attractive interest rates compared to unsecured personal loans.

As consumption needs continue to fuel retail credit growth and the outlook for mutual funds in India remains positive, industry experts expect this trend of using mutual fund units as collateral for flexible and economical secured loans to rise. This approach allows investors to meet short-term financial needs without compromising their long-term investment objectives.
Topics : Mutual Fund

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First Published: Jun 28 2024 | 4:31 PM IST

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