When an unexpected expense comes up and your money is sitting in mutual funds, the instinct is often to redeem. But redemption isn't the only option — and it isn't always the cheaper one.
What redemption actually costs
Redeeming breaks your compounding, and depending on the holding period and fund type, may trigger capital gains tax. It also permanently exits a position you may have built over years, requiring you to restart from scratch once the need has passed.
What a Loan Against Mutual Funds (LAMF) offers instead
A LAMF lets you borrow against your holdings — typically a percentage of their value — while the units stay invested and continue compounding. Interest is charged on the loan, but you avoid triggering a taxable redemption and your original investment keeps growing.
The trade-off to weigh
The comparison ultimately comes down to the loan's interest rate versus the expected growth rate of the fund you'd otherwise redeem, plus the tax you'd save by not selling. For a short-term need with a clear repayment plan, LAMF often works out cheaper. For a need that isn't time-bound, or where the underlying fund has already met its goal, straightforward redemption may be simpler.