What is Loan Against Mutual Funds?

Investors generally see mutual funds (MFs) as long-term investment avenues. (which is true!) 

But do you know, along with giving long-term wealth appreciation, MF investments can also help you at the time of a sudden financial crunch? 

How? 

You can get a loan against mutual funds (LAMF) by keeping mutual fund units as collateral. 

In this blog, we’ll explore everything about LAMF, how it works, eligibility criteria, pros and cons, and how it compares to other financing options.

What is Loan Against Mutual Funds?

A loan against mutual funds is a type of secured loan where the mutual fund units are pledged as collateral to borrow money from NBFCs, financial institutions or banks. Instead of liquidating your investments, this loan allows you to access funds while letting compounding do its magic. 

LAMF is part of a broader category known as Loan Against Securities [LAS], which includes loans against shares, bonds, and other financial assets.

Key features of Loan Against Mutual Funds

Let’s have a look at key features of LAMF:Since loan against mutual funds is asset-backed: 

• Interest rates are generally lower, varying between 9% and 13%, compared to unsecured loans, where rates can go as high as 40%. 
• No Other Collateral/ Physical Asset Required.
• Little to no impact on credit score.
• No income proof required.
• Minimal paperwork and faster processing.
• Loan approval and disbursement within 24–48 hours.

Along with the above features, investors can continue to enjoy the benefits of their mutual fund investments, such as capital appreciation and dividends, while accessing quick liquidity (at minimal interest) without having to redeem MF units. 

How Does a Loan Against Mutual Funds Work?

Below is a simple breakdown of how loan against mutual funds work. 

• The investor holds units in mutual funds; these could be equity, debt, or hybrid funds.
• To get a loan against mutual fund, one needs to approach a lender (usually a bank or an NBFC) and pledge mutual fund units as collateral. The units remain in the demat account/SOA but are marked as pledged and a “Lien” is marked in favour of the lender.

For those who are wondering, “What is Lien Marking on mutual funds?”

Lien acts as a security interest for the lender. When you pledge your mutual funds for a loan, the lender places a lien on units, which means you cannot redeem or transfer those units until the lien is released. Once the loan is fully repaid, the lien is released. 

• The lender sanctions a loan based on the current market value of mutual fund units. Usually, the loan amount is a percentage of the fund’s value (called the loan-to-value (LTV) ratio), typically between 50% and 80%, depending on the fund type and lender policies.
• Once the pledge is confirmed, the loan amount gets disbursed within a few hours or one to two days.
• Now comes the repayment part. The borrower has to repay the loan along with interest as per the agreed terms. 
• After the loan is repaid, the lender releases the pledge on mutual fund units, and the investor regains full control over them.

Eligibility Criteria and Documents Required

Loan Against Mutual Funds Eligibility

The exact eligibility criteria for LAMF vary slightly depending on the lender. However, the common conditions include. 

• Age: 18 years to 65 years 

• Residency: Must be a Indian resident

• Eligible Mutual Fund Type: Equity, debt, or hybrid funds held in demat or non-demat (folio) form

Which funds are eligible for loan against mutual funds?

• Fund Houses Accepted: SEBI-registered AMCs; mutual funds approved with CAMS, Kfintech (RTAs) and must be on lender’s approved list

• Minimum Value: Typically, mutual fund portfolio should be worth ₹50,000 to ₹1 lakh or more

Documents Required For Loan Against Mutual Funds

The LAMF process leverages digital APIs and automated KYC verification; most data is auto-fetched from demat accounts or AMC folios via platforms like CAMS, KFintech, or Depository Participant (DP). That’s why minimal documentation is required and the loan disbursement is expedited. 

Typically, you will be required to submit:

• PAN card
• Aadhar card
• Bank Account Mandate/Cancelled Cheque
• Mutual Fund Holding Statement
• Passport-size photograph

Benefits of Loan Against Mutual Funds

Opting for loan against mutual funds can be the best move when you want quick funds but also don’t want to disrupt your investment plan. Let’s have a deeper look into the key benefits:

• Retaining MF ownership & continuing earning potential returns

This is one of the best benefits of LAMF, i.e., retaining mutual fund ownership. You don’t have to sell the investments; you can simply pledge them and get a loan. This means your portfolio continues to work for your long-term financial goals and earn returns (NAV appreciation/dividends) during the loan tenure. 

• Lower interest rates

Loan against mutual funds is a secured loan; that’s why interest rates are lower than for unsecured loans. Generally, it varies between 9% and 13%. 

• Minimal paperwork and faster processing

Since mutual fund data is already digitised and available through CAMS or KFintech, the loan process is streamlined. Many banks and NBFCs offer instant or same-day loan approvals with minimal documentation, especially if mutual funds are held in demat form.

Risks and Limitations

Like any financial product, LAMF has its downsides. Here's what you should be aware of:

• Risk of Liquidation on Default

Due to any circumstances, if you miss EMIs or fail to repay the loan on time, the lender has full rights to liquidate pledged mutual fund units to recover the outstanding amount. 

• Market Volatility Can Trigger Margin Calls

Mutual funds' NAV (Net Asset Value) fluctuate with market movements. If the NAV of pledged funds drops significantly, the Loan-to-Value (LTV) ratio may exceed the lender’s permissible limit. 

In such a situation, the lender issues a margin call, and the borrower is obligated to provide additional MF units or repay the loan partially to maintain the LTV ratio. 

• Not All Mutual Funds Are Eligible

Not all funds fulfil the loan against mutual funds eligibility criteria. Generally, the below categories are opted out and may not be accepted as collateral. 

1. ELSS (Equity Linked Savings Schemes) funds with a 3-year lock-in period
2. Thematic or sectoral funds with high volatility
3. International or offshore funds

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