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.
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.
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.
| 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.
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.
Say you need ₹5 lakh and your equity holdings carry a 40% gain.
If you redeem ₹5 lakh:
If you borrow ₹5 lakh for a year at 10.5% and repay principal monthly:
So borrowing costs less than selling in this case, and it also preserves your long-term plan.
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.
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:
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.
Your name and PAN must also match exactly between your bank account and your mutual fund folio.
The whole process is digital with most NBFCs and typically completes the same day.
Good reasons to use it:
Poor reasons to use it:
If your goal is regular monthly income rather than a one-time need, a systematic withdrawal plan usually serves you better than borrowing.
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.
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.
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