Loan Against Mutual Funds – How It Works and What It Costs

You need ₹5 lakh urgently. You also have ₹15 lakh sitting in mutual funds.

Selling feels wrong because you break your compounding and pay capital gains tax. A personal loan feels expensive. So there is a third option most investors never consider: borrow against your mutual funds and keep them invested.

What Is a Loan Against Mutual Funds?

A loan against mutual funds, often called LAMF, is a secured overdraft. You pledge your units as collateral, and the lender gives you a credit limit against them.

Your units stay in your name. They keep earning returns. Your SIPs continue. Only one thing changes: you cannot redeem or switch the pledged units until you repay.

Think of it as an overdraft, not a term loan. You draw only what you need, and interest runs only on the amount you actually use.

How Much Can You Borrow? LTV Limits Explained

Lenders apply a loan-to-value ratio that depends on the fund type.

Fund Type	Typical LTV	Portfolio Needed for a ₹5 Lakh Loan
Equity and hybrid funds	45% to 50%	₹10 lakh to ₹11.1 lakh
Debt, liquid and short duration funds	75% to 80%	₹6.25 lakh to ₹6.7 lakh

Debt funds get higher LTV because their NAV barely moves. Equity funds swing, so lenders keep a bigger cushion.

Note on Regulatory vs. Lender Limits:

The Reserve Bank of India (RBI) permits lenders to offer a loan-to-value ratio of up to 75% for equity funds and up to 85% for debt funds. However, most banks and NBFCs enforce conservative internal caps (45%–50% for equity) to protect both you and the lender from sharp market swings and sudden margin calls. In addition, RBI guidelines cap total borrowing against financial securities at ₹1 Crore per individual across the entire banking system.

What It Actually Costs

Charge	Typical Range
Interest rate	9.99% to 12% a year
Processing fee	₹999 to ₹1,500, or 0.5% to 1% of the limit
Stamp duty	Around ₹500
Annual renewal	₹1,000 with some banks, nil with many NBFCs
Foreclosure charge	Usually nil
Penal interest on overdue	Around 15% a year
Bounced mandate	Around ₹500

Interest is calculated daily on the utilised amount. So if you take a ₹5 lakh limit but use only ₹1 lakh, you pay interest on ₹1 lakh alone.

The Cost Comparison

Take a ₹5 lakh need over 12 months:

Option	How Repayment Works	Total Interest
LAMF at 10.5%, principal repaid at the end	Interest only, bullet repayment	₹52,500
Personal loan at 15%	EMI reduces principal monthly	₹41,550
LAMF at 10.5%, principal repaid monthly	Interest falls as you repay	₹28,437
Credit card at 36%	EMI	₹1,02,773

A personal loan at 15% can cost less than a LAMF at 10.5%, simply because EMIs shrink the principal every month while an overdraft balance does not.

Selling Your Funds vs Borrowing Against Them

Say you need ₹5 lakh and your equity holdings carry a 40% gain.

If you redeem ₹5 lakh:

• Gains realised: ₹2 lakh
• Long-term capital gains tax at 12.5% above the ₹1.25 lakh annual exemption: ₹9,375
• An exit load of about 1% may apply if units are under a year old
• Growth you give up over the next year at 12%: around ₹60,000

If you borrow ₹5 lakh for a year at 10.5% and repay principal monthly:

• Interest: ₹28,437
• Fees: around ₹1,500
• Your ₹5 lakh stays invested and keeps compounding

So borrowing costs less than selling in this case, and it also preserves your long-term plan.

What Lien Marking Means for You

Once you apply, the lender sends a lien request to the registrar, either CAMS or KFintech. You approve it with an OTP, and the units get marked.

During the Lien	Status
Ownership of units	Stays with you
Returns and NAV growth	Continue as normal
Dividends or IDCW	You still receive them
Running SIPs	Continue, and new units stay unpledged
Redemption or switching	Blocked on pledged units only

After you repay, the lender releases the lien, usually within a few working days.

The Risk: Margin Calls

Suppose you pledge ₹10 lakh of equity funds at 45% LTV and draw ₹4.5 lakh. Then markets fall 20%, so your portfolio drops to ₹8 lakh. Your loan is now 56% of the collateral value, which breaches the agreed limit.

The lender will then ask you to either pledge more units or repay part of the loan, usually within a few days. If you do neither, the lender can sell your pledged units to bring the ratio back in line.

That is the worst possible outcome. Your units get sold at a market bottom, you pay capital gains tax on the sale, and you lose the recovery that follows.

How to protect yourself:

• Draw only 60% to 70% of your sanctioned limit, not the whole amount
• Keep spare unpledged units ready to top up
• Prefer debt funds as collateral when your need is large, since their NAV is stable
• Keep an emergency fund so a margin call never forces a fire sale

Borrowing against equity funds during a market fall is risky for exactly this reason. Our piece on why you should stay calm when your portfolio turns red explains the behavioural side of the same problem.

Which Funds You Cannot Pledge

• ELSS funds inside their mandatory three-year lock-in period
• Closed-ended schemes during their restriction window
• Folios held by minors or specific NRE/NRO accounts (most digital platforms require single adult resident accounts)
• Schemes outside the lender’s approved list (which varies by institution)
• Jointly held folios (many digital lenders only support single-holder folios)
• Units already pledged or marked under lien elsewhere

Your name and PAN must also match exactly between your bank account and your mutual fund folio.

How to Apply: The Process

1. Choose a lender and check that your AMC and scheme sit on its approved list.
2. Complete KYC and link the mutual fund folio held with CAMS or KFintech.
3. Select the units to pledge and review the limit the lender offers.
4. Approve the lien using the OTP sent by the registrar.
5. Set up the NACH mandate for monthly interest.
6. Withdraw what you need. Funds usually reach your account within minutes to a few hours.

The whole process is digital with most NBFCs and typically completes the same day.

When a Loan Against Mutual Funds Makes Sense

Good reasons to use it:

• A short-term cash gap of three to twelve months
• A medical emergency, where speed matters
• Bridging a property transaction or a business working capital cycle
• Avoiding a redemption that would trigger a large tax bill

Poor reasons to use it:

• Funding a lifestyle purchase or a holiday
• Investing the borrowed money back into markets, which doubles your risk
• Covering a long-term need better met by selling or by a cheaper loan
• Any situation where you have no clear repayment plan

If your goal is regular monthly income rather than a one-time need, a systematic withdrawal plan usually serves you better than borrowing.

Conclusion

A loan against mutual funds is a useful tool, not a clever trick. It gives you quick cash at a reasonable rate while your investments keep compounding.

Not sure whether borrowing or redeeming suits your situation? Speak to the MunafaWaala team for a review of your portfolio and goals.

Frequently Asked Questions

1. Can I take a loan against mutual funds? 

Yes, if you are an Indian resident aged 18 or above and hold eligible schemes on your lender’s approved list.

2. What is the interest rate on a loan against mutual funds? 

Usually 9.99% to 12% a year, charged daily on the amount you actually use.

3. How much loan can I get against mutual funds? 

About 45% to 50% of the value of equity funds and 75% to 80% of debt funds.

4. Do my mutual funds keep growing during the loan? 

Yes. The units stay in your name and continue to earn returns. You only lose the right to redeem them until repayment.

5. Is a loan against mutual funds better than a personal loan? 

It usually carries a lower rate, but a personal loan EMI can cost less overall if you take years to repay the principal.

6. What happens if I do not repay? 

The lender can invoke the lien and sell your pledged units to recover the dues, and your credit score takes a hit.

Disclaimer: Mutual Fund investments are subject to market risks. Please read all scheme-related documents carefully before investing.