Loan against mutual funds vs breaking your SIP: a decision framework
Need ₹6 lakh for nine months? Redeeming costs tax and lost compounding. Borrowing costs interest. We lay out the four questions that decide it.
By Sanjiv P, Founder
A client called last month. Her son's admission deposit was due in three weeks: ₹6 lakh. Her bonus would arrive in nine months. She had ₹20 lakh in equity mutual funds and her first instinct was to redeem.
We ran both options side by side.
Option A: Redeem ₹6 lakh
- Tax. Say ₹2 lakh of the ₹6 lakh is long-term gain. After the ₹1.25 lakh annual exemption, ₹75,000 is taxed at 12.5%. About ₹9,400.
- Lost growth. If the market returns 12% a year, ₹6 lakh out of the market for nine months misses roughly ₹54,000.
- Behaviour. Money that leaves a portfolio rarely comes back in full. Bonuses find other uses.
Option B: Borrow ₹6 lakh against the funds
- Interest. At around 10.5% a year for nine months: about ₹47,000.
- No tax event. Units stay invested. SIPs continue.
- Limit. Lenders typically allow up to about 50% of equity fund value. Her ₹20 lakh supports a ₹6 lakh loan comfortably.
On these numbers, borrowing cost ₹47,000. Redeeming cost about ₹63,000, plus the risk of never rebuilding. She borrowed.
The four questions that decide it
1. How long do you need the money? Under 12 to 18 months, a loan usually wins. Beyond that, interest compounds against you and redemption often makes more sense.
2. Is the repayment certain? A confirmed bonus or a maturing FD, yes. "Business should pick up," no. If repayment is uncertain, do not borrow.
3. What is the tax on redemption? Large unrealised gains tilt toward a loan. Funds near cost, or in a loss, tilt toward redeeming.
4. Can you handle a margin call? If markets fall 25%, the lender may ask for more security or partial repayment. Keep the loan well under the limit so that never happens.
Where people go wrong
They treat the loan as permanent. A loan against mutual funds is a bridge, not a lifestyle. We set a repayment date on day one and put it in the client's calendar.
Our loan vs liquidate calculator runs this comparison with your own numbers.