Pledging Mutual Funds vs Shares: Which one is Better?

When you need urgent funds, selling your investments may not always be the best option. Instead, pledging them can help you raise money without disturbing your long-term financial plans. But the question many investors ask is—should you pledge mutual funds or shares? Which one is more beneficial, more flexible, and safer?

In this article, we’ll break down the key differences between pledging mutual funds and shares and help you decide which is better based on your financial situation.

What Does Pledging Mean?

Pledging simply means offering your investments (like shares or mutual funds) as security or collateral to take a loan from a bank or NBFC. The investments remain in your name, and you continue to benefit from them—such as dividends or capital gains—but they cannot be sold unless the loan is repaid.

Once the loan is cleared, the pledge is removed, and you regain full control over your investments.

Why Consider a Loan Against Investments Instead of Selling Them?

Imagine you need ₹5 lakh urgently for a medical emergency or a business need. Selling your investments might not only result in tax implications or capital loss but also break your long-term financial goals. Instead, pledging allows you to:

• Get quick liquidity
• Retain your portfolio
• Continue earning returns (like dividends or NAV growth)

Now let’s see how pledging mutual funds compares with pledging shares.

Loan Against Mutual Funds

When you take a loan against mutual funds, the lender marks the units as a lien and gives you a loan based on a percentage of their current Net Asset Value (NAV). This percentage is called the Loan-to-Value ratio (LTV), and it usually ranges between 50% to 75% depending on the type of mutual fund (equity, debt, or hybrid).

Advantages of Pledging Mutual Funds

1. Stable Returns: Debt mutual funds, in particular, are less volatile. This gives lenders more confidence and helps you get a better LTV ratio.
2. Lower Risk of Margin Calls: NAVs of mutual funds don’t fluctuate as wildly as stock prices, so the risk of lenders asking you to top up your collateral is lower.
3. Diversification Advantage: Mutual funds are inherently diversified, which reduces the concentration risk compared to holding just a few stocks.
4. Digital & Fast Process: Many fintech NBFCs and financial platforms now allow you to pledge MFs completely online, with disbursals within a few hours.

Things to Keep in Mind

• Not all mutual funds are accepted—only certain schemes, mostly from AMCs registered with CAMS or KFintech, are eligible.
• You may not receive dividends during the pledge period if the lien restricts such payouts.
• Equity mutual funds are more volatile than debt funds, so LTVs on them may be lower.

Loan Against Shares

If you own listed shares of well-performing companies, you can also opt for a loan against shares by pledging them to a lender. Here, too, the lender creates a lien on the shares, and you receive a loan based on their market value.

LTV ratios for shares are typically around 50%. However, the final amount also depends on the type of stock, trading volume, and whether it is on the lender’s approved list.

Advantages of Pledging Shares

1. Retain Ownership: Like mutual funds, you don’t sell your shares—you use them as leverage to get liquidity.
2. Dividends Continue: Most lenders allow you to keep receiving dividends from pledged shares, which can be used to repay your loan.
3. Faster Approval if Demat is with Same Lender: If your shares are in a demat account with the same institution, the loan can be disbursed very quickly.

Risks and Drawbacks

• High Volatility: Shares can be very volatile. If their value falls sharply, lenders can issue a margin call asking you to either provide more collateral or repay part of the loan.
• Limited Stock List: Lenders usually have a list of approved stocks. Shares not on that list are not eligible.
• Lower LTV: Because of the volatility, you typically get a lower percentage of the loan compared to the market value.

Comparison: Mutual Funds vs Shares

Which One Should You Choose?

The right choice depends on the type of investments you hold and your financial priorities. Here are some scenarios to guide you:

Choose Mutual Funds If:

• You have a diversified portfolio of equity and debt funds.
• You want higher LTV with a lower risk of margin calls.
• You prefer stable investments and want a smoother borrowing experience.

Choose Shares If:

• You hold blue-chip or large-cap stocks from the lender’s approved list.
• You’re confident in the stock’s performance and don’t expect high volatility.
• You want to continue receiving dividends.

Tips Before You Pledge

1. Check the Lender’s Policy: Not all lenders offer the same terms. Compare interest rates, processing fees, and foreclosure charges.
2. Be Mindful of Loan Tenure: Loans against securities are usually short-term (up to 12–36 months). Ensure you can repay within this period.
3. Avoid Over-Leveraging: Taking too much loan against volatile securities can be risky. Borrow only what you need.
4. Monitor Your Investments: Even though pledged, your investments will continue to fluctuate in value. Stay updated to avoid sudden margin calls.

Conclusion

Pledging mutual funds and shares is a smart way to unlock liquidity without breaking your investments. While shares offer faster loans if you’re already set up with a demat account, mutual funds—especially debt and balanced funds—tend to offer better stability and higher loan value. If you’re looking for lower risk and better control, pledging mutual funds may be a better choice. 

However, if you hold high-quality stocks and want to retain dividend income, pledging shares might be more beneficial. Before making your decision, evaluate the pros and cons, compare lender terms, and choose the one that aligns best with your needs and risk profile.