During Onam, a loan against mutual funds may help eligible investors meet planned expenses without redeeming long-term investments. However, borrowers should compare the interest rate, loan limit, repayment terms, and market-linked risks before proceeding. 

Families may need funds for planned expenses such as home improvements, education payments, travel or other commitments. Investors who already hold eligible mutual fund units may consider borrowing against them instead of redeeming their investments. 

This is because a loan against mutual fund holdings allows selected units to be pledged as collateral while they remain invested. This may provide short-term liquidity without immediately disturbing a long-term investment plan, subject to scheme eligibility, lender policies and market conditions. 

• Why Consider a Loan Against Mutual Funds During Onam? 

A loan on mutual fund units may be useful when the expense is planned, the repayment source is clear and the investor does not want to liquidate long-term holdings. 

Eligible units are pledged or marked under a lien in favour of the lender. They remain in the investor’s name but generally cannot be redeemed while pledged. The lender then provides a credit limit based on the type and current value of the accepted units. 

This facility may be more suitable for a manageable financial requirement than for unnecessary festive spending. Borrowers should first check whether the expense can be met through income or available savings without affecting their emergency fund. 

Also Read - Pledging vs Redeeming Mutual Funds: Key Differences Explained

• Key Benefits of Choosing a Loan Against Mutual Funds This Onam

Investments need not be redeemed immediately 

1. Selling mutual fund units may interrupt an investment plan and could lead to exit loads or tax implications, depending on the scheme and holding period. 
2. With a loan against eligible units, the investments remain in the portfolio while pledged. However, they continue to be market-linked and may gain or lose value. 

Interest may apply only to the amount used 

1. Some facilities are structured as an overdraft or credit line. In such cases, interest may be charged only on the amount withdrawn rather than on the full sanctioned limit. 
2. Borrowers should confirm whether the facility is a term loan, overdraft or another form of secured borrowing before accepting it. 

The application process may be convenient 

1. Digital verification, online pledging and electronic lien-marking may allow eligible customers to complete much of the process remotely. 
2. An instant loan against mutual funds generally refers to a faster digital process. It does not guarantee approval or immediate disbursal, as verification and lien creation are still required. 

It may support short-term liquidity 
A loan against mf may help when the borrower expects to repay the amount within a defined period and wishes to avoid redeeming investments intended for longer-term goals. 

• How Does a Loan Against Mutual Funds Work During Onam?

The process generally involves four steps: 

1. Eligibility Check: The lender reviews the applicant and mutual fund holdings.  
2. Selection of Units: Only schemes accepted by the lender can be pledged.  
3. Lien Creation: A lien is marked on the selected units.  
4. Sanction and Use: A credit limit is approved based on eligible collateral and lender policies.  

The sanctioned amount is usually lower than the market value of the pledged units because lenders maintain a margin against possible market fluctuations. 

• What Determines the Interest Rate? 

The loan against mutual funds interest rate may vary according to: 

1. The lender’s pricing policy  
2. The type of units pledged  
3. The sanctioned limit  
4. The borrower’s profile  
5. The facility structure and tenure  
6. The applicable benchmark and spread  
7. Processing, renewal and other charges  

A lower quoted rate may not always mean a lower total cost. Borrowers should compare the interest rate with processing fees, lien-related charges, renewal costs and penalties for delayed repayment. 

They should also check whether the rate is fixed or floating and how often it may change. 

Also Read - How Does a Loan Against Mutual Funds Work? A Complete Guide for Investors

• What Potential Risks Should Borrowers Understand? 

A loan against mutual funds is secured by market-linked investments, so the value of the collateral can change. 

If the value of the pledged units falls significantly, the lender may ask the borrower to provide additional collateral or repay part of the outstanding amount. If the required margin is not restored, the lender may have the right to redeem pledged units, subject to the loan agreement. 

Other important risks include: 

1.  Pledged units generally cannot be redeemed until the lien is removed.  
2. The investor may be unable to rebalance those units during the loan period.  
3. Borrowing against investments may affect long-term goals.  
4. Interest and charges continue until the outstanding amount is repaid.  

Borrowers should not treat the approved limit as additional income. 

• What Should You Check Before Applying? 

Before choosing the facility, review: 

1. Scheme eligibility  
2.  Available loan limit  
3. Applicable margin  
4. Interest rate and charges  
5. Repayment and renewal terms  
6. Steps followed if market values decline  
7. Conditions for removing the lien  
8. Prepayment terms  

It is also worth comparing this option with using available savings, postponing the expense, or selecting another suitable form of credit. 

• When May This Loan Be Suitable During Onam? 

A loan against mutual funds may be considered when the expense is planned, repayment is manageable and redeeming investments would disrupt a long-term strategy. 

It may not be suitable when income is uncertain, existing debt is high, or the funds are required mainly for discretionary festive spending. The decision should be based on the purpose of borrowing, total cost and ability to repay without affecting essential financial goals. 

• FAQs 

1.    Can all mutual fund schemes be pledged? 
No. Eligibility depends on the lender’s approved list of schemes and applicable conditions. 
2.    Do pledged mutual funds continue to earn returns? 
The units remain market-linked and may gain or lose value. This means that potential gains are not assured. 
3.    Is an instant loan against mutual funds approved immediately? 
Processing may be quick, but approval depends on verification, eligibility and lien creation. 
4.    Is the interest rate fixed? 
It may be fixed or floating, depending on the lender and facility terms. 
5.    Can pledged units be redeemed? 
They generally cannot be redeemed until the outstanding amount is cleared and the lien is removed. 
 

Disclaimer: The article is for information purpose only. The views expressed in this article are personal and do not necessarily constitute the views of The South Indian Bank Ltd. or its employees. The South Indian Bank Ltd and/or the author shall not be responsible for any direct/indirect loss or liability incurred by the reader for taking any financial/non-financial decisions based on the contents and information’s in the blog article. Please consult your financial advisor or the respective field expert before making any decisions.