Selling your mutual fund investments during a financial crunch may seem like the easiest way out—but is it the smartest? Many investors liquidate their funds in emergencies, unaware that they can actually unlock liquidity without disrupting their investment goals. That’s where a Loan Against Mutual Funds (LAMF) comes into the picture.
This article will walk you through everything you need to know about LAMF, and why it’s a smarter, more strategic alternative to selling your mutual fund holdings.
What is a Loan Against Mutual Funds?
A Loan Against Mutual Funds allows you to borrow money by pledging your mutual fund units as collateral. Instead of redeeming your investments prematurely, you give the lender the right to hold your mutual fund units until you repay the loan. The units remain invested, and you can still benefit from market growth and dividends (in some cases).
This facility is offered by banks and NBFCs (Non-Banking Financial Companies) through an overdraft account or term loan. The amount you can borrow depends on the type of mutual fund (equity or debt) and the Loan-to-Value (LTV) ratio offered.
Why Not Just Sell Your Mutual Funds?
You may think selling your funds during a financial emergency is a fast and simple solution. But this decision can have several downsides:
- Loss of Compounding: When you exit the fund early, you lose out on long-term compounding benefits.
- Tax Implications: Redemptions may attract capital gains tax, depending on how long you’ve held the investment.
- Market Timing Risk: You may end up selling at a market low, only to regret it later when the market recovers.
- Disruption of Financial Goals: Investments are usually linked to goals like retirement or education. Selling them could jeopardize these plans.
A Loan Against Mutual Funds offers an elegant solution—it lets you meet your short-term needs while keeping your long-term goals intact.
Key Features of a Loan Against Mutual Funds
- Quick Processing: Many lenders offer instant digital approvals and disbursals, especially if you have a demat account.
- Flexible Loan Amount: Depending on the fund value and LTV ratio, you can borrow from ₹10,000 up to ₹10 crore.
- No Prepayment Charges: Most lenders do not charge penalties if you repay the loan early.
- Overdraft Facility: You pay interest only on the amount you use, not the entire sanctioned limit.
- Continued Investment Growth: Your mutual fund units remain invested and can appreciate in value over time.
How Much Can You Borrow?
The loan amount depends on the Loan-to-Value (LTV) ratio, which is the percentage of the mutual fund’s current market value that a lender is willing to offer as a loan.
- For equity mutual funds, the LTV is usually around 40-50%.
- For debt mutual funds, it can go up to 75-80%.
Let’s say you have ₹5 lakh in equity mutual funds. If the lender offers 50% LTV, you can get a loan of ₹2.5 lakh.
Types of Mutual Funds Eligible
Most lenders accept both equity and debt mutual funds, including:
- Large-cap, mid-cap, small-cap, ELSS
- Hybrid funds
- Debt funds like liquid, ultra-short duration, and corporate bond funds
However, the final approval depends on whether the fund is on the lender’s approved list. Funds with consistent performance and high AUM (Assets Under Management) are more likely to be accepted.
Interest Rates and Charges
Interest rates on LAMF are generally lower than personal loans because the loan is secured by your mutual fund units. As of 2025, rates typically range from 9% to 12% p.a., depending on the lender and your credit profile.
Other charges may include:
- Processing fee (typically 0.5% to 1%)
- Pledge creation fee (if applicable)
- Annual renewal fee for overdraft limits
How the Process Works
Here’s a simple step-by-step overview:
- Application: You apply online or offline with your PAN, Aadhaar, and mutual fund folio details.
- Fund Pledge: The lender initiates a lien/pledge request with the mutual fund registrar (CAMS/KFintech).
- Verification: Once approved, the mutual fund units are pledged, and you cannot redeem them until the loan is repaid.
- Disbursal: The loan amount is disbursed to your bank account or overdraft facility is activated.
- Repayment: You can repay the loan in EMIs or as a lump sum. Interest is charged only on the used amount in overdraft accounts.
Advantages Over Traditional Loans
Compared to unsecured loans like personal loans or credit cards, LAMF offers several benefits:
- Lower interest rates
- Faster approval and disbursal
- No need to sell your investments
- No income proof required in many cases
- Only a lien is created; ownership remains with you
It’s ideal for self-employed individuals, freelancers, or investors looking for liquidity without disrupting their portfolio.
When Should You Consider LAMF?
A Loan Against Mutual Funds is ideal for:
- Emergency medical expenses
- Short-term business needs
- Education fees
- Wedding expenses
- Debt consolidation
In all these cases, you get immediate funds while your investments continue to grow.
Risks and Considerations
While LAMF is a smart alternative, there are a few things to keep in mind:
- Market Risk: If your mutual fund value drops, the lender may ask you to pledge more units or repay part of the loan (called a margin call).
- Repayment Obligation: Like any other loan, missing payments can hurt your credit score.
- Limited Fund Eligibility: Not all mutual fund schemes are accepted by all lenders.
It’s crucial to evaluate your repayment ability before opting for the loan.
Conclusion
If you’re facing a cash crunch but don’t want to disturb your investment strategy, a Loan Against Mutual Funds can be a smart, efficient, and cost-effective solution. It gives you the power to access liquidity without sacrificing your long-term financial goals.
However, like any financial product, it should be used wisely. Always compare interest rates, terms, and eligible schemes before applying. And remember—your investments are meant to grow. With LAMF, you don’t have to choose between your future and your present.
