What is a loan against mutual funds?

A loan against mutual funds (LAMF) lets you borrow using your mutual fund units as security. Instead of selling units to raise cash, you place a lien on them in favour of a bank or NBFC, and the lender gives you a credit line. Your money stays invested, and once you repay, the lien is removed.

Most LAMF facilities work like an overdraft. You get a limit, draw what you need and pay interest only on the amount used. That makes it useful for needs measured in weeks or months rather than years.

How the pledge and limit work

When you apply, you choose which folios or demat holdings to pledge. The lien is marked through the fund's registrar or your depository, usually with an OTP.

The lender does not lend the full value. It applies a haircut to each fund, and equity funds get a bigger haircut than debt funds because their NAVs move more.

As an illustration, suppose you pledge ₹6 lakh of equity fund units and ₹4 lakh of debt fund units, and a lender allows 50% on equity and 75% on debt. Your limit would be ₹3 lakh plus ₹3 lakh, or ₹6 lakh. Actual percentages vary by lender and scheme.

Margin shortfall: the risk to plan for

Your limit is not fixed. It is recalculated as NAVs change.

Continuing the illustration, if you have drawn ₹5.8 lakh and equity markets fall 20%, your equity units drop to ₹4.8 lakh and their contribution to the limit falls to ₹2.4 lakh. The total limit becomes ₹5.4 lakh, leaving a shortfall of ₹40,000.

You would then need to repay that amount or pledge more units within the time the lender allows. If you cannot, the lender may redeem pledged units, often when prices are already low. Redemption also counts as a sale for tax: equity fund gains are taxed at 20% if short term and 12.5% above ₹1.25 lakh a year if long term.

Things to compare before you choose

  • Approved fund lists and the limit each lender gives on your specific schemes.
  • Interest rate and APR, plus processing, renewal and lien charges.
  • Shortfall rules: how much time you get and how the lender contacts you.
  • Overdraft or term loan structure.

Our team compares LAMF offers from 40+ banks and NBFCs and helps you keep an eye on your limit while the loan runs.