Loan Against FD or Mutual Funds – 7 Crucial Factors You Must Check

Loan Against FD or Mutual Funds: When you urgently need funds but don’t want to break your long-term investments or take an expensive unsecured loan, there are smarter ways to borrow. Two popular options are:

• Loan against Fixed Deposit (FD)
• Loan against Mutual Funds (MFs)

Both allow you to borrow while keeping your investments intact. However, they differ in eligibility, risk, cost, and flexibility.

👉 In this guide, we’ll break down loans against FDs vs loans against mutual funds and help you decide which option is best for your financial situation.

✨ Key Takeaways

• 💰 Loan against FD is safer and offers lower interest rates.
• 📈 Loan against mutual funds allows you to retain market exposure but comes with risks.
• ⚡ FD loans are quicker to process, while MF loans require lien marking and more checks.
• 🏦 FD loans allow higher borrowing (up to 90% of deposit), while MF loans allow 50–70% of fund value.
• ⚖️ Choosing the right option depends on your need, investment nature, and repayment ability.

🏦 What is a Loan Against Fixed Deposit?

A loan against FD is a secured borrowing facility where your fixed deposit acts as collateral. Most banks and NBFCs allow FD holders to borrow up to 90% of their deposit value.

✅ Advantages:

• FD remains intact and continues to earn interest.
• Loan interest rate is usually 1%–2% higher than FD interest.
• Quick approval if FD is with the same bank.

📌 Example:
If your FD earns 7.5% p.a., the loan rate may be around 8.5%–9.5% p.a.

📉 What is a Loan Against Mutual Funds?

A loan against mutual funds lets you pledge your MF units (equity or debt) and borrow against them. Banks and NBFCs assess the Net Asset Value (NAV) and provide credit, typically 50–70% of the current value.

✅ Advantages:

• Your MF units remain invested and can continue generating returns.
• No need to sell your investments during emergencies.

⚠️ Limitation:

• You cannot redeem pledged units until the loan is repaid.
• If the NAV falls sharply, lenders may demand additional security (margin call).

📌 Example:
For mutual fund loans, interest rates generally range between 9%–12% p.a., depending on the fund type.

⚖️ 7 Key Factors to Consider Before Choosing

Let’s compare loans against FDs and mutual funds across 7 important factors 👇

1️⃣ Purpose of the Loan 🎯

• Loan against FD: Best for short-term cash needs, like paying bills, covering medical expenses, or emergency liquidity.
• Loan against MF: Suitable when you want to retain exposure to the stock market and avoid redeeming funds during volatile conditions.

2️⃣ Nature of Investment 📊

• FDs: Safe, stable, and guaranteed returns. Loan eligibility remains unaffected.
• Mutual Funds: Market-linked. If equity markets fall, NAV decreases, and your borrowing capacity may reduce.

👉 If you are risk-averse, FD loans are better. If you are comfortable with market risks, MF loans can work.

3️⃣ Interest Cost 💸

• FD Loan Rates: 1%–2% above FD rate. Example: FD @7.5% → Loan @8.5%–9.5%.
• MF Loan Rates: 9%–12% p.a. (higher due to market risk).

📊 Quick Comparison Table:

4️⃣ Loan Amount & Eligibility 📝

• FD Loan: Higher borrowing power (up to 90%).
• MF Loan: Limited to 50–70% depending on fund type:
  • Debt funds → Higher eligibility (closer to 70%).
  • Equity funds → Lower eligibility (closer to 50%).

5️⃣ Processing & Documentation 📑

• Loan Against FD:
  • Usually instant, especially if FD is held with the same bank.
  • Minimal paperwork.
• Loan Against MF:
  • Requires lien marking on pledged units.
  • Verification with AMC (Asset Management Company).
  • More time-consuming if investments are spread across multiple AMCs.

6️⃣ Market Volatility & Risk 📉

• FD Loan: No effect from market fluctuations → safe and predictable.
• MF Loan: NAV fluctuations can reduce loan eligibility. If values drop significantly, lenders may issue a margin call asking you to pledge more units or repay part of the loan.

👉 This makes FD loans risk-free, while MF loans are risk-sensitive.

7️⃣ Repayment Flexibility 🔄

• FD Loans: Often structured as an overdraft facility. You only pay interest on the amount utilized, with no fixed EMIs.
• MF Loans: Can be structured as overdraft or term loans with EMIs, depending on the lender.

📌 If you prefer flexible repayment, FD overdraft loans are better.

✅ Which One Should You Choose?

Here’s a quick guide 👇

• Choose Loan Against FD if:
  • You want lower interest costs.
  • You prefer a risk-free borrowing option.
  • You already have a sizable FD with the same bank.
• Choose Loan Against MF if:
  • Most of your wealth is in mutual funds.
  • You don’t want to redeem funds during a market downturn.
  • You’re okay with some risk and can handle margin calls.

⚠️ Things to Keep in Mind

• Always check processing fees and hidden charges.
• Compare interest rates across banks and NBFCs before finalizing.
• Do not over-borrow—treat these loans as a short-term liquidity tool, not a long-term credit option.
• Consult a financial advisor if unsure about risk exposure.

📌 Disclaimer

This article is for educational purposes only and aims to spread awareness about credit products like loans, credit cards, and credit scores. Borrowing comes with risks such as high interest, hidden charges, and potential financial stress. Always discuss with a certified financial expert before taking any credit decision.

✨ Final Word:

A loan against FD is the safer and cheaper option, while a loan against mutual funds gives flexibility but adds risk. The right choice depends on your financial goals, liquidity needs, and risk appetite.