Unlock Fast Cash with Loan Against Mutual Funds

Life often throws financial curveballs, and in such moments, quick access to cash becomes essential. Instead of redeeming your mutual fund units which can disrupt your long-term goals and trigger capital gains tax you can consider a smarter option: a Loan Against Mutual Funds (LAMF).

This innovative solution allows you to unlock liquidity without selling your investments. In this article, we’ll explore how LAMF works, its pros and cons, and whether it suits your financial needs.

What is a Loan Against Mutual Funds (LAMF)?

A Loan Against Mutual Funds (LAMF) allows you to borrow money against the value of your existing mutual fund holdings. Consider it a loan using your mutual fund units as collateral. You don’t sell your investments; instead, you pledge them as security for the loan.

Benefits of Loan Against Mutual Funds

Liquidity without Disruption:

This is the primary advantage of LAMF. You access cash without selling your mutual funds, allowing your investments to continue growing potentially.

Lower Interest Rates:

Lenders typically offer lower interest rates on LAMFs compared to personal loans or credit cards. As a result, you can save significantly on borrowing costs especially when taking out larger loans.

Faster Processing:

Obtaining an LAMF is often quicker than applying for a fresh loan. The lender already has your investment details, streamlining the process.

Tax-deductible Interest:

You can potentially deduct the interest paid on a Loan Against Mutual Fund (LAMF) from your taxable income under Section 24(b) of the Income Tax Act, 1961. This benefit applies when you use the loan for specific purposes such as business expenses, investing in certain assets, or funding higher education. In contrast, if you redeem your mutual funds, you may have to pay capital gains tax, depending on the type and duration of your investment.

Equity Funds:

For equity funds held for less than 1 year, short-term capital gains are taxed at 15% (plus applicable surcharge and cess). Equity funds held for more than 1 year attract Long Term Capital Gains (LTCG) tax. If the LTCG exceeds Rs 1 lakh per year, a 10% tax with indexation benefit applies.

Debt Funds:

Short-term capital gains from debt funds are taxed according to your income tax slab. LTCG from debt funds are taxed at a flat rate of 20% with indexation benefit.

Example:

Imagine you invested INR 5 lakh in a mutual fund, and over time, it grows to INR 7 lakh. Then, an emergency expense of INR 2 lakh arises. Instead of redeeming your investment, you can opt for a LAMF. You simply borrow INR 2 lakh against your INR 7 lakh portfolio without selling any units. Meanwhile, your mutual fund continues to grow in value. Additionally, you may benefit from tax deductions on the interest paid for the loan.

Things to Consider Before Opting for LAMF

• Margin Requirement: Lenders provide a percentage of your mutual fund’s value (typically 50-75%) as a loan. A market downturn could trigger a “margin call,” forcing you to either top up the margin or sell some of your holdings.
• Impact on Investment Returns: While you retain ownership of your mutual funds, the loan repayment obligation can impact your overall return on investment.
• Tax Implications: Consult a tax advisor to understand the tax treatment of interest paid on LAMF and any potential capital gains implications if you sell holdings to meet a margin call.

Is LAMF Right for You?

LAMF can be a valuable tool if used strategically. Here are some situations where LAMF might be a good fit:

• Short-term emergencies: For unexpected medical bills, urgent home repairs, etc., Loan Against Mutual Funds allows access to cash without disrupting your long-term investment goals.
• Funding short-term goals: Need funds for a down payment on a two-wheeler or a child’s school admission? You may find a LAMF to be a better option than liquidating your entire investment.
• Debt consolidation: If you have high-interest debt from credit cards or personal loans, consolidating it with a lower-interest LAMF can save you money. To get detailed guidance about LAMF click here.

Conclusion

Loan Against Mutual Funds offers a convenient way to access funds from your mutual funds without selling them. However, it’s crucial to understand the risks involved, like margin calls and potential tax implications. Carefully evaluate your financial situation and investment goals before opting for LAMF. Consulting a financial advisor can be extremely helpful in making an informed decision. To get detailed guidance about LAMF, click here.