Why Loan Against Mutual Funds Is a Convenient Option for Investors

What Is a Loan Against Mutual Funds?

Loan Against Mutual Funds (LAMF) is a secured loan that allows investors to borrow money from a lender without having to sell their interests by pledging eligible mutual fund units. Instead of redeeming fund units, investors might mark the pledged units with a lien to retain ownership while gaining liquidity.

The majority of lenders provide LAMF as an overdraft facility, allowing customers to take out funds as needed up to the authorised credit limit. Interest is only assessed on the amount used, not the approved cap. The lien is lifted and the mutual fund units are once again freely available after the loan is paid back.
 

Benefits of Loan Against Mutual Funds

A loan against mutual funds offers liquidity while allowing investments to remain intact.

Lower Interest Rates

Interest rates for LAMFs, which are secured loans, typically range from 9% to 12% annually, depending on the lender, fund type, and borrower profile.

Higher Loan-to-Value (LTV)

Subject to lender and regulatory limits, lenders may offer up to 50% of the value of equity mutual funds and up to 80% of the value of qualified debt mutual funds.

Continue Your Investments

Your mutual fund units remain invested during the loan tenure, allowing them to participate in market movements while meeting temporary liquidity needs.

Flexible Overdraft Facility

Many lenders provide an overdraft against mutual funds, allowing borrowers to withdraw funds whenever required and pay interest only on the utilised amount.

Potential Tax Advantage

Borrowing through LAMF typically does not result in capital gains tax because investors do not redeem their mutual fund units.
Pro Tip: Redeeming your investments early may be more expensive than taking out a loan against mutual funds if you need short-term money but anticipate that your investments will increase over time.
 

How Does a Loan Against Mutual Funds Work?

Using the relevant Loan-to-Value (LTV) ratio, the lender first assesses the qualifying mutual fund units and establishes the maximum borrowing limit. Following approval, the pledged units are designated with a lien that prevents them from being redeemed until the outstanding loan is paid off. The majority of lenders offer the approved amount via an overdraft facility, which enables customers to take money out as needed. The lender may request further security from the borrower or use a margin call to repay a portion of the outstanding balance if the market value of the pledged units drops considerably.

Step-by-Step Process

1. Apply for a loan against eligible mutual fund units.
2. Complete KYC and lender verification.
3. Mutual fund units are pledged through lien marking.
4. The lender calculates the eligible LTV.
5. An overdraft or loan account is activated.
6. Withdraw funds as required.
7. Repay the outstanding amount with applicable interest.
8. The lien is removed after full repayment.

What Is Lien Marking?

The process by which a lender temporarily charges pledged mutual fund units is known as lien marking. The units are still owned by the investor, but they cannot be redeemed or transferred until the loan is paid back in full. The lender demands that the lien be lifted once all outstanding payments have been made, giving the investor complete control over the investments.

How the Overdraft Facility Works

The value of the pledged mutual fund units determines the borrowing limit that the lender approves under an overdraft facility. Borrowers can access cash whenever needed and just pay interest on the amount used, rather than taking out the full amount at once.

Example

Let's say Neha receives a ₹5 lakh overdraft limit after pledging ₹10 lakh worth of mutual fund units. For emergency expenses, she only takes out ₹2 lakh. Rather than the entire ₹5 lakh limit, interest is only assessed on ₹2 lakh.

Loan-to-Value (LTV) Ratio

The maximum amount that a lender may approve in relation to the market value of pledged mutual fund units is determined by the Loan-to-Value (LTV) ratio. The type of mutual fund and the lender's policies determine the applicable LTV.

Borrowing Examples

Interest Rates and Charges on LAMF

The loan against mutual funds interest rate generally starts from around 9% per annum, although actual rates vary across lenders and borrower profiles.

Besides interest, lenders may charge:

• Processing fees
• Documentation charges
• Penal interest on delayed payments
• Stamp duty, where applicable

Although borrowers should check any applicable fees before applying, many lenders do not impose prepayment penalties. 

Because LAMF is backed by promised mutual fund investments, it often offers lower interest rates than personal loans.
 

Who Is Eligible for a Loan Against Mutual Funds?

Applicants must satisfy the lender's eligibility requirements before applying.

Eligibility Checklist

• Indian resident individuals (lender-specific policies may apply)
• Generally 18 years or above
• Completed KYC requirements
• Holder of eligible mutual fund units
• Mutual funds accepted by the lender
• Satisfactory borrower verification

Exclusions

• Some lenders may not accept:
• Certain close-ended schemes
• ELSS funds during the lock-in period
• Suspended or restricted schemes
• Other ineligible mutual funds as per lender policy
   

Documents Required

Keep the following documents ready while applying.

Checklist

• PAN Card
• Aadhaar Card or valid identity proof
• Address proof
• KYC documents
• Mutual fund holding statement
• Bank account details
• Passport-sized photograph (if required)
• Cancelled cheque (where applicable)

LAMF vs Personal Loan

Compare LAMF and personal loans to understand which borrowing option best suits your financial needs. 

How to Apply for a Loan Against Mutual Funds Online

Follow these simple steps.

1. Compare lenders offering LAMF.
2. Check loan against mutual funds eligibility.
3. Complete the online KYC process.
4. Select eligible mutual fund units for pledge.
5. Authorise lien marking and complete e-sign.
6. Receive approval from the lender.
7. Access the sanctioned overdraft or loan amount.
8. Repay dues to release the pledged units.
 

Things to Keep in Mind / Risks & Limitations

Although LAMF offers flexibility, borrowers should understand its limitations.

• Market declines may trigger margin calls.
• Pledged units cannot be redeemed until the lien is removed.
• Some mutual fund schemes are not eligible for pledging.
• Failure to repay the loan may allow the lender to enforce the pledge, subject to the loan agreement.
• Interest costs increase if the outstanding amount remains unpaid for a longer period.
• LTV limits may vary depending on the lender and mutual fund category.
   

Conclusion

A loan against mutual funds can be a useful option for investors seeking funds without liquidating their investments. Understanding what is loan against mutual funds and how the facility works can help investors make informed borrowing decisions. The sanctioned amount depends on factors such as portfolio value, fund type, and lender policies. By offering access to liquidity while preserving long-term investment holdings, this borrowing option can support financial requirements without disrupting an investor’s overall investment strategy.