Building Emergency Fund Using Loan Against Mutual Funds: A Practical Guide For Families
Author
Quicklend Team
Published
13 February 2025
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In India, where unexpected medical bills, educational costs, or urgent home repairs can arise at any time, an emergency fund is not just a financial safety net—it’s peace of mind. While setting aside funds every month is the traditional approach, some families face challenges building up a substantial emergency fund quickly enough to cover sudden needs. This is where leveraging loans, specifically loans against mutual funds (LAMF), can be an effective strategy.
Here are some practical tips on building and managing an emergency fund using loans
Understand the Basics of an Emergency Fund
An emergency fund typically covers three to six months of essential expenses. These can include:
- Rent or mortgage payments
- Utility bills.
- Grocery and medical expenses
- School or education costs
For an average Indian family, maintaining an emergency fund of around ₹1–2 lakhs could be ideal. But if setting aside this amount seems daunting, using a loan to create an emergency fund can be a practical alternative, especially when it’s a low-interest loan against mutual funds.
Why Consider a Loan to Build an Emergency Fund?
Borrowing to fund an emergency reserve might seem unconventional. But loans against assets, such as mutual funds, have advantages over other loan types:
- Quick access to funds: An instant loan against mutual funds provides immediate access to cash, often within hours.
- Low-interest rates: Compared to credit cards or personal loans, loans against mutual funds generally have much lower interest rates, making them more affordable.
- Flexible repayment options: You can repay the loan at a convenient pace without worrying about overwhelming EMIs.
This approach allows families to have a buffer without needing a large upfront savings pool, which can take months or years to accumulate.
Why Loans Against Mutual Funds (LAMF) Are the Best Option for Building an Emergency Fund
When building an emergency fund, many people consider various types of loans, such as personal loans or credit cards. However, a loan against mutual funds (LAMF) offers unique advantages, making it one of the best options for creating a reliable safety net.
1. Lower Interest rates
Compared to personal loans or credit cards, LAMF typically comes with significantly lower interest rates, as mutual funds are considered a secured asset. This helps you save money on interest and keeps your debt manageable, even when you borrow a substantial amount.
2. No Need to Liquidate Investments
By taking a loan against mutual funds, you don’t have to sell your investments. This means your money stays invested, continuing to grow and earning returns, which is particularly useful if your mutual funds are performing well.
3. Quick Processing and Disbursement
Since mutual funds act as collateral, the loan approval and disbursement process is often much faster than with unsecured loans. With Quicklend, for example, you can expect near-instant processing, which ensures you have access to funds precisely when you need them most.
4. Flexible Repayment Options
Many lenders, including Quicklend, offer flexible repayment terms on LAMF. This flexibility allows you to customize your repayment schedule to fit your financial situation, so you can stay on top of your budget and avoid the strain of high monthly installments.
5. Maintain Financial Stability
Using LAMF to build an emergency fund provides a financial buffer without requiring a significant upfront savings commitment. This is ideal for families focused on financial growth but needing immediate access to emergency funds.
At Quicklend, we specialise in instant loans against mutual funds with highly competitive rates, designed to provide the flexibility and speed Indian families need in times of urgency. Whether you’re setting up an emergency fund or planning for unforeseen events, Quicklend’s solutions help you stay financially prepared without compromising your long-term goals.
Steps to Create an Emergency Fund Using a Loan
Step 1: Assess Your Financial Position
Start by calculating essential monthly expenses and multiply by three to six to find the emergency fund target. For example, if your monthly needs are around ₹30,000, aim to build a fund of at least ₹90,000 to ₹1.8 lakhs.
Step 2: Borrow Wisely
For families who invest in mutual funds, borrowing against these investments can be a savvy choice. Quicklend, for instance, offers instant loans against mutual funds with competitive interest rates. Ensure the loan amount aligns with your emergency fund target, as over-borrowing could lead to higher interest burdens.
Step 3: Set a Repayment Strategy
Once you’ve secured the loan, outline a repayment plan that fits your budget. Many families opt to allocate a small portion of their monthly income toward repayment, while any surplus income (e.g., bonuses or tax refunds) goes to the loan principal. This approach helps to avoid any prolonged financial strain.
Step 4: Invest to Rebuild the Emergency Fund
If you end up using part or all of your emergency fund, plan to replenish it promptly. Start by allocating a portion of your income to mutual fund SIPs (Systematic Investment Plans), which helps gradually rebuild the fund. Since SIPs allow small, regular contributions, they’re accessible even for families with moderate incomes.
Alternative Options: Emergency-Ready Savings Plans
Loans aren’t the only way to prepare for emergencies. Consider combining your emergency fund with other liquid investments, such as:
- Recurring deposits: These offer guaranteed returns and can be closed early if needed.
- Liquid mutual funds: These can be redeemed easily and usually within a day, providing quick access to cash.
- Insurance policies with cash value: Some policies allow for withdrawals or loans against their cash value, providing added flexibility.
Avoiding Common Pitfalls
When building an emergency fund using loans, be mindful of:
- Over-borrowing: Only borrow what you absolutely need to avoid unnecessary interest.
- Misuse of funds: Ensure the emergency fund is used solely for genuine emergencies, not for discretionary spending.
- Ignoring the repayment plan: Stick to your plan to avoid prolonged debt and interest accumulation.
Building an emergency fund using loans, especially against mutual funds, can be a strategic option for Indian families facing cash-flow limitations. With careful planning and disciplined repayment, this approach enables financial readiness without disrupting long-term financial goals. If this sounds like a viable path for your family, consider speaking with Quicklend about how our instant loans against mutual funds can help you secure your financial future.
