(ANI/VMPL) When you require funds urgently but want to avoid breaking long-term investments or applying for unsecured loans, a loan against fixed deposit (FD) or a personal loan against mutual funds can be a practical solution. Both options allow you to borrow while retaining your investment, but each comes with its own benefits, risks, and eligibility requirements.
Here we compare loans against FDs and mutual funds, helping you understand which option suits your financial situation better. Let us explore the key factors you must consider before borrowing against either instrument.
What is a loan against fixed deposit?
A personal loan against fixed deposit is a secured borrowing option where your fixed deposit serves as collateral. Most banks and NBFCs offer this facility to FD holders, allowing you to borrow a certain percentage of the deposit amount–usually up to 90%.
As your fixed deposit remains intact, it continues to earn interest during the loan tenure. The interest rate on the loan is typically 1% to 2% higher than the interest rate offered on the FD.
What is a loan against mutual funds? A loan against mutual funds allows you to pledge mutual fund units in exchange for funds. This is offered by banks and non-banking financial companies through online or offline modes.
Lenders assess the value of your mutual fund holdings (equity or debt) and offer a line of credit, usually up to 50-70% of the current value. You can continue to earn returns on the pledged funds, although you may not be able to redeem them during the loan period.
Factors to consider before borrowing
1. Purpose of the loan: If you need a short-term loan for personal needs, a loan against fixed deposit may be quicker and easier. However, if your funds are invested in mutual funds and you want to retain exposure to markets, a loan against mutual funds can be considered.
2. Nature of investment: FDs are stable and offer guaranteed returns. Borrowing against them does not affect their value. Mutual funds, especially equity-based ones, are market-linked. If markets fall, the value of pledged units may reduce, affecting your loan eligibility and risk exposure.
3. Interest cost: Loans against FDs usually have lower interest rates since they are backed by guaranteed instruments. On the other hand, loans against mutual funds carry slightly higher interest rates due to market volatility and credit risk.
For example, FD return: 7.5% per annum, Loan rate is 8.5 per annum to 9.5 per cent per annum and Mutual fund loan is 9% to 12% p.a. depending on asset class
4. Loan amount and eligibility: FD loans allow higher loan-to-value ratios (up to 90%). Loans against mutual funds may offer only 50-70%, and this depends on the type of mutual fund (debt vs equity) and the fund’s current NAV.
5. Processing and documentation: Loan against FD is often pre-approved or can be availed instantly if the FD is held with the same institution. Mutual fund loans may require lien marking, fund verification, and may involve more documentation, especially if the investments are spread across AMCs.
6. Market volatility and risk: FDs are not affected by market movements, making loans against them low risk. Mutual fund loans come with a risk of falling NAV, which may trigger a margin call. If the value of pledged units drops significantly, you may have to pledge additional units or partially repay the loan.
7. Repayment flexibility: Most FD loans are structured as overdraft facilities, allowing interest-only payments with no fixed EMIs. Mutual fund loans can also be structured as overdrafts, but some lenders may offer term loans with EMI repayment.
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