Loan Against Mutual Funds: Good or Bad?

I have always followed your advice that only home and education loans are good loans. Would a loan against mutual funds be an exception to that?

Yes, for the short term.

If you need the loan, take it only for the short term, never for the long run. Never think in terms of 10 or 20 years, where you build a corpus, and 50 per cent of it is mortgaged. I would never encourage that. I normally say: only take a home loan or an education loan. Effectively, both are investments. There is a difference between borrowing to consume and borrowing to invest.

Education, to my mind, is great. I do not want to lecture anyone on this, but I think even parents who can fund their child’s education may find it worth borrowing a small amount. It makes the child sensitive to the cost and to the money going into their education, and it builds the discipline to repay. Keep it a small amount, because it is very unwise to start one’s career with a big liability, but there is great value in it. The second benefit is the credit discipline that comes with it.

The other is the home loan. First, it is perhaps the cheapest borrowing available. Second, you start enjoying the house. Third, home prices also appreciate. It is an investment, so all these things come together. But in any case, borrowing against mutual funds for the long run is a very bad idea. The only case for it is short-term borrowing that lets you avoid disrupting your investments and running up a tax bill.

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