Loan against mutual funds is a simple financial product, but it is surrounded by misconceptions. Many investors avoid it — or worry unnecessarily — because of myths they have heard.

Let us clear up the five most common myths with facts.

Myth 1: “I Will Lose Ownership of My Mutual Fund Units”

The Fact: You retain complete ownership of your units throughout the loan period.

When you take a loan against mutual funds, a lien is marked on your units. This is simply a temporary hold that prevents you from selling or switching those specific units until the loan is repaid.

But you still:

• Own the units
• Benefit from any NAV appreciation
• Receive dividends (where applicable)
• See the units in your portfolio

Once you repay the loan, the lien is removed, and your units are completely free again. At no point during the loan does ownership transfer to the lender.

The lender only has the right to liquidate the units if you default on the loan — and even then, any surplus amount after recovering the loan is returned to you.

Myth 2: “My Mutual Fund Returns Will Stop While the Units Are Pledged”

The Fact: Your mutual fund units continue to earn returns as usual.

This is one of the biggest misconceptions. Pledging your units does not freeze them. The fund manager continues to manage the portfolio, the NAV continues to move based on market performance, and your units fully participate in all gains (and losses).

Here is what happens:

• If you pledged equity fund units and the market goes up 15% during your loan period — your units grow by approximately 15%
• If you pledged debt fund units — they continue to earn interest and credit accrual as usual

The lien is an administrative marker at the RTA level. It has zero impact on how the fund operates or how your units perform.

This is actually one of the biggest advantages of a loan against mutual funds: your money works for you even while you are borrowing against it.

Myth 3: “Taking a Loan Against Mutual Funds Will Hurt My Credit Score”

The Fact: A loan against mutual funds, when repaid on time, can actually help your credit score.

Every loan appears on your credit report, and a loan against mutual funds is no exception. But here is what matters:

• Secured loans are viewed more favourably by credit bureaus than unsecured loans (like personal loans or credit card debt)
• Timely repayment of any loan improves your credit history
• A mix of credit types (secured and unsecured) can actually strengthen your credit profile

What can hurt your credit score is defaulting on any loan — whether it is a personal loan, a home loan, or a loan against mutual funds. As long as you repay on time, a LAMF is just like any other responsibly managed loan on your credit report.

If anything, choosing a secured loan over an unsecured loan for the same need shows better financial judgement — and credit bureaus reflect that.

Myth 4: “The Process is Complicated and Takes Days”

The Fact: Loan against mutual funds is one of the fastest loan products available.

In the past, pledging mutual funds involved physical paperwork, visits to the AMC or RTA office, and manual lien marking. That process was indeed slow and tedious.

Today, the process is fully digital:

1. Select the mutual fund units you want to pledge
2. Verify your identity (e-KYC)
3. Authorise the lien marking electronically
4. Receive the loan amount in your bank account

Many platforms can complete this entire process in under 30 minutes. The lien is marked electronically through the RTA (CAMS or KFintech), and disbursement happens once the lien is confirmed.

The repayment process is equally simple — pay through net banking or UPI, and the lien is removed within 1-3 business days.

Myth 5: “It Is Better to Just Redeem My Mutual Funds Instead of Taking a Loan”

The Fact: Redeeming is almost always more expensive than borrowing against your holdings.

This is the most costly misconception. Let us look at what happens when you redeem vs. when you borrow:

When You Redeem Mutual Funds:

• Exit load: 1% if equity fund units are held for less than 1 year
• Capital gains tax: 20% STCG (if held less than 1 year) or 12.5% LTCG above ₹1.25 lakh (if held more than 1 year)
• Lost compounding: The redeemed units are gone permanently. They will not participate in any future market growth
• Reinvestment risk: When you want to re-invest later, the market may be at a higher level

When You Borrow Against Mutual Funds:

• No exit load: You are not selling anything
• No capital gains tax: There is no redemption, so no taxable event
• Compounding continues: Your units stay invested and keep growing
• Interest cost: You pay interest on the loan, which is typically 9-12% per annum

A Quick Example

Suppose you have ₹10,00,000 in an equity mutual fund held for 8 months. You need ₹5,00,000.

If you redeem ₹5 lakh:

• Exit load (1%): ₹5,000
• Short-term capital gains tax (20% on gains): Depends on gains, could be ₹10,000-₹30,000
• Future growth lost on redeemed units: Potentially lakhs over the next 5-10 years

If you borrow ₹5 lakh against your holdings:

• Interest for 6 months at 10.5%: ~₹26,250
• Processing fee: Nil
• Exit load: Nil
• Tax: Nil
• Units continue growing

In most scenarios, the interest cost of a short-term loan is significantly less than the combined cost of exit load, taxes, and lost future growth from redemption.

Bonus: “Only Large Investors Can Get a Loan Against Mutual Funds”

While not one of the top 5, this is worth addressing. You do not need a massive portfolio to qualify. Many lending platforms offer loans against mutual fund holdings starting from as low as ₹50,000 to ₹1,00,000 in portfolio value.

If you have a moderate mutual fund portfolio, it is worth checking whether your holdings are eligible for pledging.

Key Takeaways

Understanding these facts can help you make better decisions when you need short-term liquidity. A loan against mutual funds is a straightforward, cost-effective financial tool — as long as you understand how it works and use it responsibly.