In case of a grave contingency, the fund requirement may exceed the amount kept in an emergency fund and one may not be left with any other option but either to liquidate his/her investments or to take a loan.

However, liquidating investments abruptly may derail fulfillment of long-term financial goals, while taking a loan involves interest payouts. So, one needs to take an informed decision on whether to take out money invested for long-term goals, or to take a loan.

Liquidating investments vs taking loans

The decision will depend on the earning prospect through an existing investment, vis a vis the rate of interest payable on a loan – apart from the fact the difficulty one may face in availing a low-interest loan.

So, in case you have a debt-oriented mutual fund (MF) scheme giving an average CAGR of around 5 per cent, it will be better to redeem it, rather than taking a loan at 10 per cent interest.

On the other hand, if you have an equity-oriented MF scheme having a prospect of giving 15 per cent CAGR return in the long term, it would be better to take a loan at 10 per cent interest, rather than redeeming the fund.

Finding a cheaper loan

Unsecured loans – like personal loans – are expensive in comparison to secured loans – like home loan, auto loan, loan against securities etc.

As home loans and auto loans can’t be used for any other purpose but to buy a home and a vehicle respectively, loan against securities is the best option to borrow money to meet the requirement during an exigency.

With a diversified portfolio and the prospect of generating higher long-term return, equity-oriented MF schemes are one of the best options, against which financial institutions generally issue loans readily at an attractive rate.

Moreover, your investments through Systematic Investment Plan (SIP) will continue uninterrupted even after taking loan against the MF scheme.

How to avail loans against MF

In case you are making online investments, you may avail paperless loans against the MF units almost instantly with a prior approval. In case of physical investments, sanctioning loans may take a bit longer, as a loan agreement with the financier/bank should be in place.

However, you need to pledge your MF units as security to avail the loan, which would create a lien against the units pledged for the purpose.

The lien will only be removed, once the loan is repaid. You may ask for partial removal of the lien, in case of part repayment of the loan.