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Loan Against Mutual Funds: A Flexible Way to Raise Cash Without Selling Investments
- Ripradaman R
- Jan 19
- 2 min read
Introduction
A loan against mutual funds allows investors to borrow money by pledging their mutual fund units as collateral.
It helps raise liquidity without redeeming investments.
This option is best suited for short-term needs where repayment discipline is strong.
What Is a Loan Against Mutual Funds?
A loan against mutual funds (LAMF) is a secured loan where your mutual fund units are pledged to a lender.
You continue to remain the owner of the investments
Units are marked as lien, not sold
Loan amount depends on the fund type and value
How a Loan Against Mutual Funds Works
The process is largely digital and quick.
Mutual fund units are pledged via depository
Lender assigns a loan limit based on NAV
Interest is charged only on the amount used
Units are released once repayment is complete
How Much Loan Can You Get?
The loan value depends on the risk profile of the mutual fund.
Equity mutual funds: typically 50–60% of NAV
Debt mutual funds: up to 70–80% of NAV
Hybrid funds fall in between
Loan value fluctuates with market movements
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Interest Rates and Costs Involved
Interest rates are usually lower than unsecured loans.
Rates are generally lower than personal loans
Interest charged only on utilised amount
Processing fees may apply
Penal charges if margin shortfall occurs
Key Benefits of Loan Against Mutual Funds
This option offers financial flexibility without disturbing long-term goals.
No need to redeem investments
Avoids capital gains tax on redemption
Faster access to funds
Suitable for short-term liquidity needs
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Risks and Limitations to Know
LAMF is not risk-free and requires discipline.
Market fall can trigger margin calls
Failure to top up may lead to forced redemption
Not ideal for long-term borrowing
Interest costs can add up if misused
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Who Should Consider This Option?
Loan against mutual funds works best for a specific investor profile.
Investors with stable repayment capacity
Short-term cash needs
Those avoiding disruption of long-term investments
Disciplined borrowers who track margins regularly
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Conclusion
A loan against mutual funds is a practical liquidity tool when used responsibly.
It preserves investments while meeting short-term cash needs.
The key lies in disciplined repayment and understanding market risks.
FAQ
Q1. Is loan against mutual funds better than a personal loan?
Yes, interest rates are usually lower, but it requires market-linked collateral.
Q2. Will my mutual funds continue to earn returns during the loan?
Yes, returns continue, but units remain pledged until repayment.
Q3. What happens if markets fall sharply?
You may need to provide additional margin or repay part of the loan.
Q4. Can SIPs continue on pledged mutual funds?
Yes, SIPs can usually continue unless restricted by the lender.
Q5. Is loan against mutual funds suitable for long-term needs?
No, it is best used for short-term funding requirements.
Citations
Securities and Exchange Board of India (SEBI)
Reserve Bank of India (RBI)
Association of Mutual Funds in India (AMFI)
National Stock Exchange of India (NSE)
Leading Indian Banking Institutions
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