I Almost Sold My Mutual Funds to Pay a Tax Bill. I Am Glad I Stopped Myself.

Photo by Towfiqu barbhuiya on Unsplash

A few months ago I was staring at an advance tax payment that was larger than the cash I had sitting in my savings account. My first instinct, the same instinct I think most people have, was to log into my mutual fund app and redeem a chunk of my equity holdings. The money would be there in two or three days, the tax would be paid, and I could move on.

I had my finger on the redeem button when a friend who works in wealth management asked me a simple question. Why would I sell an asset that had taken me four years to build, just to cover a bill I would clear in a couple of months anyway? That question changed how I think about short-term liquidity entirely.

The hidden cost of redeeming

When you redeem mutual funds, you are not just getting cash. You are doing three things at once. You are exiting the market, which means you stop earning returns on that money. You are potentially triggering a capital gains tax event, which adds to the very tax problem you were trying to solve. And you are breaking a position that you originally entered for a long-term goal.

In my case, the units I was about to sell had grown nicely. Selling them would have crystallised gains I did not need to realise, and it would have pulled me out of a fund right when I wanted to stay invested. The math of redeeming looked clean on the surface and ugly underneath.

The alternative I did not know existed

My friend pointed me toward a loan against mutual funds. The idea is straightforward. Instead of selling your units, you pledge them as collateral and borrow against their value. Your units stay invested, they keep tracking the market, and you get the cash you need.

I had vaguely heard of this but assumed it was a slow, paperwork-heavy bank product. It is not, at least not on the platform I ended up using. The pledging for mutual funds happens entirely through an OTP-based flow. There is no branch visit and no physical signing. You accept the terms digitally and the credit facility opens up against your holdings.

What actually surprised me

Three things stood out once I looked closely.

First, there was no credit score check. Because the loan is secured against my own units, the lending partner does not run a CIBIL check or set a minimum score. My collateral does the talking.

Second, I only pay interest on what I actually use, and only for the time I use it. The facility I set up was larger than my tax bill, but I drew exactly what I needed. The undrawn portion costs nothing. That is very different from a personal loan, where you pay interest on the entire sanctioned amount from day one.

Third, the loan against equity funds gave me up to 70 percent of my holdings value, which is the highest in the industry. For context, the RBI permits up to 75 percent, and most other lenders cap this kind of borrowing at around 50 percent. I had far more headroom than I needed for a tax bill.

How it played out

I pledged a portion of my equity funds, drew the amount I needed for the tax payment, and repaid it over the next few months as my cash flow recovered. My units never left my portfolio. They kept growing through that entire window. When I finished repaying, unpledging was instant and free.

Looking back, redeeming would have cost me market returns, a capital gains hit, and a long-term position. Borrowing against the same units cost me a few months of interest on a small drawn amount. It was not close.

If you are in the same spot

I am not saying borrowing is always the right answer. If you no longer want to hold a fund, sell it. But if the only reason you are selling is a short-term cash need, it is worth checking what you could borrow against your portfolio first. The check itself takes seconds and only needs your PAN.

You can check your eligibility against your mutual funds here and see your number before you decide anything. That one step saved me from a decision I would have regretted.