Although mutual funds don't always trade like stocks, you can hold them in the same types of accounts that you use to hold stock or other investment vehicles. As such, any loan option that you have for that account can be used to borrow against mutual fund holdings in that account. However, depending on where you're taking the loan from, you might need to sell the mutual fund shares to borrow the money.
Funds in 401(k)s
Mutual funds in a 401(k) account can be used as part of a 401(k) loan, if your employer's 401(k) plan rules allow it. When you borrow from your 401(k) plan, your money is taken out of the mutual fund or other investment that you have and is used for your loan. The interest you pay goes into your 401(k), so you benefit from it, but you lose the return on the money taken out of your mutual fund.
Funds in IRAs
If you need just a short-term loan, the IRS' rollover provisions let you borrow from your individual retirement account for up to 60 days. To access the funds, you'll need to sell your mutual fund shares in your IRA. Because it's inside the IRA, the sale isn't taxable. Then, you can pull the money out and spend it as you wish. As long as you redeposit the money within 60 days, this is considered a tax-free rollover. You then can rebuy your mutual fund shares. But if you don't pay the loan back in 60 days or less it'll be treated as an early distribution, and you'll have to pay income tax and a 10 percent penalty on it.
When you hold your mutual fund shares in a brokerage account, you might be able to take out a margin loan against it. Many brokerage funds let you borrow against your holdings to give you money to buy more stock, or in many cases to take out of your account. You generally can borrow up to 50 percent of the value of your holdings, and you don't have to sell them to take out the loan.
Drawbacks to Margin
Margin loans are subject to strict requirements tied to the value of your account. Because your loan is secured by mutual fund shares whose prices vary, your broker usually wants the value of the stock in your account to be greater than the amount of your loan. If you fall below the equity requirement, the loan will be called, meaning you'll need to deposit money or else your broker will sell your mutual fund shares to pay down the loan.
Steve Lander has been a writer since 1996, with experience in the fields of financial services, real estate and technology. His work has appeared in trade publications such as the "Minnesota Real Estate Journal" and "Minnesota Multi-Housing Association Advocate." Lander holds a Bachelor of Arts in political science from Columbia University.