When an unexpected expense hits, your immediate priority is arranging funds without disrupting your long-term financial plans.
Instead of redeeming your investments and potentially losing out on future returns, you have another option: borrowing against your existing investments.
So if your portfolio contains Public Provident Fund (PPF) and mutual fund investments, both can provide quick access to funds, but they differ significantly in terms of rules and conditions.
A loan against Public Provident Fund (PPF) and a loan against mutual funds are both secured borrowing options, but they are designed for different investor profiles and financial situations.
Here’s a detailed comparison to help you decide which emergency funding option is better suited to your financial needs.
Loan against PPF
A loan against PPF can only be availed during a specific period. The first loan can be taken from the third financial year from the year in which the PPF account was opened. Thereafter, loans can be availed up to the end of the sixth financial year, provided any earlier loan has been fully repaid.
The loan amount is restricted to 25% of the balance available at the end of the second financial year immediately preceding the year in which the loan is applied for.
Since the loan is backed by a government-backed savings scheme, the borrowing cost is relatively low, with the interest rate currently fixed at 1% above the prevailing PPF interest rate.
For example, if a PPF account was opened during FY 2023-24, the first eligible loan can be taken in FY 2025-26. The maximum loan amount would be limited to 25% of the balance standing in the account as on 31 March 2024. If the investor applies in FY 2026-27, the eligible amount would instead be calculated based on the balance as of 31 March 2025.
Loan against mutual funds
Loan against mutual funds (LAMF) can be availed against mutual fund units held in both Statement of Account (SOA) i.e., Physical and Demat form, although the pledge creation process differs.
The facility is generally available to resident individuals, HUFs, partnership firms, LLPs, companies, and trusts, subject to the lender’s credit policy and KYC requirements. Equity, debt, hybrid, and liquid mutual fund schemes may all qualify, although the financing terms vary depending on the underlying risk profile.
The eligible loan amount is determined by the market value of the pledged units and the applicable Loan-to-Value (LTV) ratio. While LTV varies across lenders, debt and liquid funds generally qualify for higher LTVs of around 70–80%, whereas equity-oriented funds attract 50%, reflecting their relatively higher market volatility.
Lenders may also consider portfolio diversification and concentration while determining the final loan eligibility.
Interest rates generally range between 9% and 12% p.a., depending upon the borrower’s credit profile, the type of mutual fund pledged, and the loan structure. Many lenders offer the facility as an overdraft, wherein interest is charged only on the amount utilised rather than the sanctioned limit.
Borrowers may also incur processing fees, pledge creation charges, documentation charges, or renewal fees, depending upon the lender’s pricing policy.
Repayment may be structured as an overdraft, EMI-based loan, or bullet repayment, with loan tenures generally ranging from one to three years and renewable subject to the lender’s policy.
“Since the value of mutual fund investments fluctuates with changes in the Net Asset Value (NAV), lenders continuously monitor the collateral. If the portfolio value falls and the prescribed LTV is breached, the borrower may be required to provide additional collateral or partially repay the loan to restore the stipulated margin, failing which the lender may invoke the pledge,” said Jugal Mantri, Executive Director and CEO, Anand Rathi Global Finance.
Example
For a Rs 4 lakh emergency requirement, the better option depends on the investor’s portfolio and repayment flexibility. A PPF loan is capped at 25% of the eligible balance, meaning an investor would require roughly Rs 16 lakh in PPF to borrow Rs 4 lakh. The interest rate is around 8.1% (PPF rate of 7.1% + 1%).
In contrast, a Loan Against Mutual Funds (LAMF) typically offers 50-80% loan-to-value, so only about Rs 8 lakh of mutual fund holdings may be sufficient to raise the same amount. More importantly, investors continue to remain invested, preserving potential long-term returns instead of redeeming their investments.
“For investors whose mutual fund portfolio is generating around 11% annualised returns, borrowing against those holdings at around 9-10% can be more efficient than redeeming investments, as it avoids interrupting long-term wealth creation and potential tax implications,” stated Akshat Garg, Head – Research & Product at Choice Wealth.
However, LAMF borrowers should be mindful of margin calls if markets decline.
“While PPF offers lower borrowing costs, mutual funds generally provide greater flexibility and access to a larger loan amount, particularly for investors with sizeable investment portfolios,” commented Prashant Gupta, Chief Business Officer, SAMCO Wealth.
Which option is more suitable for salaried individuals, self-employed professionals, and retirees?
The choice depends less on the investor category and more on the nature of assets available and the urgency of funding requirements.
For salaried individuals who regularly invest through SIPs and have accumulated meaningful mutual fund investments, a loan against mutual funds can be an efficient way to raise short-term liquidity without disturbing long-term wealth creation. Instead of redeeming investments and potentially interrupting compounding or triggering capital gains tax, they can access funds while remaining invested.
For self-employed professionals and business owners, who often experience uneven cash flows, a loan against mutual funds can offer greater flexibility because the available loan amount is generally higher and the facility can be accessed relatively quickly, subject to lender processes.
For retirees, the decision depends on the asset mix. Those who have built a significant corpus in PPF and require a modest short-term loan during the eligible loan period may find a PPF loan to be a cost-effective option because of its relatively lower borrowing cost.
However, retirees with substantial mutual fund investments may also consider a loan against mutual funds if they wish to avoid redeeming investments, particularly when the requirement is temporary, and they expect markets to recover over time.
“The objective should not simply be to borrow at the lowest interest rate, but to choose the funding source that preserves long-term wealth while addressing immediate liquidity needs,” recommended Prashant Gupta.
For investors with diversified financial assets, a loan against mutual funds often provides greater flexibility, whereas PPF remains a conservative borrowing option within the limits prescribed under the scheme.
Disclaimer: This article is for informational purposes only and should not be construed as financial or investment advice. Loan terms, interest rates, eligibility criteria, and lender policies may vary. Please consult your financial advisor or lender before making any borrowing decision.
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