When you need money for a short period, selling your mutual fund units isn't the only option. A Loan Against Mutual Funds (LAMF) lets you pledge your units as security and borrow against them, while the units stay invested.

How it works

  1. You choose the units to pledge from your existing holdings.
  2. A lien is marked on those units through the registrar. You can't redeem them while the lien is in place, but they continue to earn returns.
  3. The lender sanctions a limit based on the value of the pledged units.
  4. You draw what you need. Many lenders offer an overdraft-style facility where interest is charged only on the amount used, for the days it is used.
  5. When you repay, the lien is released and your units are free again.

How much can you borrow?

Lenders lend a percentage of the market value of your units, called the loan-to-value (LTV) ratio. Because debt funds are less volatile, they usually get a higher LTV than equity funds. Exact limits depend on the lender and regulations.

The value of your units changes every day, and so does your available limit.

Why people consider it

  • Investments stay invested, so long-term goals and compounding aren't interrupted.
  • No capital gains are triggered, because nothing is sold.
  • Interest rates are often lower than unsecured personal loans, because the loan is secured.
  • Flexible repayment — many facilities let you repay any time without fixed EMIs.
  • Mostly digital process, with quick disbursement in many cases.

Risks to understand

  • Margin calls. If markets fall and your pledged units lose value, the lender may ask you to repay part of the loan or pledge more units within a set time.
  • Forced sale. If a margin call isn't met, the lender can redeem pledged units to recover the dues — possibly at a bad time.
  • Interest still adds up. If the loan runs for a long time, the interest can outweigh the benefit of not selling.

When it can make sense

A LAMF is usually best suited to short-term needs where you expect to repay within months — such as bridging a gap until a payment arrives — rather than long-term borrowing.

Questions to ask a lender

  • What LTV applies to each of my funds?
  • What is the interest rate, and how is it charged?
  • Are there processing, renewal or foreclosure charges?
  • How much notice will I get for a margin call, and how can I meet it?

Our lending desk works with multiple lenders and can explain the terms each one offers.