Across the world, and specifically in India, we have seen a huge increase in interest rates over the past couple of years owing to a higher cost of funds. This has put people availing credit in a spot of bother, especially when people need cash for an emergency, a big purchase, or even to invest in something new. One option that's growing in popularity is getting a loan against mutual funds. But are these loans really cheaper than they appear, especially when they're structured as credit lines? Let's break it down.

What Are Loans Against Mutual Funds?

To understand the costs involved, we first need to know what a loan against mutual funds really is. Simply put, this type of loan allows you to borrow money using your mutual fund units as collateral. Just like how you'd use a house to get a mortgage, your mutual funds can help you secure a loan without having to sell them. It is one of the fastest growing secured lending segments, especially given the rally in mutual funds over the past few years and the robustness of the Indian economy. This can be appealing to investors looking to maintain their investments while accessing cash.

Comparing Costs: Interest Rates and Fees

The first question many people ask is about the interest rates. Loans against mutual funds typically have lower interest rates than personal loans or credit cards. Why? Because they're secured loans. The lender has your mutual funds as backup, which makes them feel safer. But don't get too excited just yet. Always check the fine print for any additional fees or charges that could add to the total cost. Sometimes, those fees can sneak up on you!

At Quicklend, we've taken the route of being absolutely transparent and detailed in our approach to explaining the expenses. Fret not, we've got your back.

Flexibility: A Key Advantage

One major perk of loans against mutual funds is flexibility. You're not locked into fixed payments like you would be with a traditional loan. Since they often function as a line of credit, you can borrow/draw down what you need when you need it. Think of it like a safety net. You can pull money from it when times are tough without having to go through a lengthy application process each time. This could save you both time and stress during urgent situations. Like that particular time when you feel your insurance doesn't cover your hospital expenses. Or that time when you need liquidity fast to close a real estate deal without having to sell your MFs and incur taxes.

Repayment: Is It Really Easier?

When considering the ease of repayment, loans against mutual funds can appear attractive. You can repay them on your terms, making it somewhat easier to manage your finances. However, keep in mind that failing to repay the loan could lead to your mutual fund units being sold off to cover the dues. So, while it feels like a cushion, you are still walking on a tightrope.

At Quicklend, we do take a buffer on our customer's behalf to ensure that they don't have to balance-walk at all times.

The Risk Factor: What Could Go Wrong?

No financial decision is without risks. If the market dips and the value of your mutual funds drops significantly, you might face a margin call, which means you'll need to pay back your loan sooner than expected. This can feel like a double whammy. You're in need of cash, and suddenly your investment might not be worth as much. It's essential to keep this possibility in mind before diving in.

Conclusion: Are They Worth It?

In conclusion, loans against mutual funds can offer lower interest rates and greater flexibility, making them a potentially cheaper option than they seem at first glance. However, it's crucial to weigh the risks involved and understand the conditions tied to such loans.

We believe in being transparent and communicative to our customers at Quicklend. To that end, find this calculator which will assist you and explain how a Loan against Mutual Fund is actually cheaper than the rate announced.