Borrow vs. Redeem: Should You Take a Loan Against Mutual Funds to Avoid Taxes?

When life throws a curveball — be it a medical emergency, an urgent home repair, or a temporary cash crunch, your mutual fund investments might seem like the quickest way out. But redeeming them comes at a cost. Not only could you miss out on future returns, but you might also trigger a hefty capital gains tax.

There’s a smarter alternative many investors overlook: taking a Loan Against Mutual Funds (LAMF). This option allows you to borrow money without actually selling your units—so your investments stay intact and continue to grow.

In this article, we’ll explore how borrowing can help you avoid tax on mutual fund redemptions and whether it’s the right strategy for your situation.

Key Takeaways

• Borrowing against mutual funds helps you avoid capital gains tax.
• Your investments stay untouched and continue to earn returns.
• The process is quick, paperless, and interest-only.
• Ideal during market highs or when your long-term goals are still in play.

Why Pay Tax When You Can Borrow?

Selling your mutual fund units isn’t just about timing the market — it’s also about timing your taxes. Let’s look at how LAMF can sidestep this burden.

What is the tax on mutual fund redemptions?

When you redeem mutual fund units, any profits are taxed as capital gains:

• Short-term gains (if sold before 3 years for debt funds, 1 year for equity funds) are taxed at slab rates.
• Long-term gains (beyond holding periods above) are taxed at 10 – 20%, depending on the type of fund.

For example, if you redeem ₹5 lakh and make ₹1 lakh in long-term gains, you could pay ₹10,000 or more in tax.

How do loans help save tax?

Loans don’t involve selling units. Instead, they’re secured by pledging your mutual fund holdings as collateral:

• You borrow against the current value without triggering a sale.
• Since there's no transaction or capital gain, no tax is applied.
• If you repay early, you still hold all your units and avoid losing any compounding benefit.

This approach is especially useful during temporary liquidity needs.

Is Borrowing Against Mutual Funds Worth It?

A Loan Against Mutual Funds isn’t just about saving tax — it’s about making a smart, flexible choice. Here's what makes it worth considering.

What are the key benefits?

• You stay invested: Your SIPs and long-term goals continue uninterrupted.
• Quick disbursal: Loans get approved in hours — ideal for emergencies.
• Only pay interest: You’re charged only on the amount you use.

This option suits investors who are cash-strapped in the short term but don’t want to sacrifice long-term returns.

What is the eligibility criteria and process?

Getting started is easier than you might think:

• Eligible funds: Most debt and equity mutual funds from SEBI-registered AMCs qualify.
• Application process: Fully digital; approval often within 15 minutes.
• Disbursal: Funds can be credited within 4 – 6 hours in many cases.

Loan providers like Quicklend also coordinate directly with your AMC for lien marking and documentation, making the process seamless.

When Should You Redeem Instead?

While borrowing works well in many scenarios, there are a few where redeeming your mutual funds might still make sense.

Are there times redemption makes sense?

• No repayment ability: If you can’t repay the loan in the near future, redemption might be safer.
• End-of-goal use: When you're cashing out investments at maturity (e.g., retirement, home down payment).
• Tax-free cases: ELSS funds after 3 years are tax-exempt up to ₹1 lakh in long-term gains.

What are the trade-offs?

Redemption isn’t always harmful — but be mindful of:

• Missing out on compounding if markets grow after you exit
• Poor market timing, especially if prices are down
• Re-entry costs, including exit loads and rebalancing issues

Conclusion

If you need liquidity but want to avoid disturbing your investment plans — or triggering unwanted taxes — a Loan Against Mutual Funds might be the better path. You get access to quick cash, retain full ownership of your portfolio, and continue to benefit from market growth.

With Quicklend, you can apply online, get fast approvals, and borrow with confidence. Before redeeming your mutual funds, it’s worth checking if borrowing is the smarter move.

This is general guidance. For personalized loan advice, contact our team at Quicklend.