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Retail investors tend to liquidate their investments in terms of emergency or crisis leaving their long-term objective behind it in jeopardy. However, with mutual fund units being the new collateral, several investors are now seen effectively leveraging it without liquidating for their short-term requirements.
There has been a steady increase in the number of mutual fund investor accounts, with Assets Under Management (AUM) from individual investors rising to Rs.34.5 lakh crore. Individual investors contribute a significant 88% towards equity-oriented schemes, yet only 59% of their equity investments are held for more than 24 months. This indicates a tendency among retail investors to redeem mutual funds when in need of liquidity for emergencies such as medical expenses, unforeseen costs, or travel.
Loans against mutual funds present a more efficient way for these investors to raise liquidity while continuing to hold their investments for long-term goals. According to Mirae Asset Financial Services, business expenses (~30%), home or office renovations (~19%), and bill payments and school or college fees (~18%) are the primary reasons retail investors opt for loans against mutual funds and shares. Other common reasons include wedding expenses, refinancing, and travel.
The NIFTY 50 index has delivered approximately 14% CAGR over the last five years and around 12% CAGR over the last decade, demonstrating that long-term returns on investments typically exceed the cost of borrowing for short-term needs. Therefore, rather than selling long-term investments, leveraging these assets as collateral for short-term expenses is a more advantageous strategy, said Krishna Kanhaiya, CEO, Mirae Asset Financial Services, that lends against mutual fund units and stocks.
The seamless way of pledging the MF units and revoking the same without any hassles of physical movement unlike other collateral like gold or real estate has been an added advantage coupled with attractive interest rate compared to unsecured personal loans among others.
With increasing consumption needs fuelling retail credit growth and the positive outlook of mutual funds in India, flexible & economical secured loans aided by the new-age collateral without compromising long-term investment objectives is expected to rise, officials noted.

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