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Loan Against Mutual Funds: A Flexible Way to Raise Cash Without Selling Investments
- Ripradaman R
- 24 hours ago
- 3 min read
Introduction
A loan against mutual funds allows investors to unlock liquidity without redeeming their units.
Instead of selling investments, you pledge them as collateral.
It offers flexibility, but it is not suitable for every situation.
Understanding costs and risks is critical before opting for it.
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What Is a Loan Against Mutual Funds?
A loan against mutual funds (LAMF) is a secured loan.
You pledge your mutual fund units to a bank or NBFC and receive funds in return.
Key features:
Units remain invested
Ownership stays with you
Loan amount depends on fund type
Interest is charged only on the utilized amount (in overdraft cases)
It provides liquidity without disturbing long-term compounding.
How Much Loan Can You Get?
The loan-to-value (LTV) ratio varies.
Typically:
Equity mutual funds: 50–60% of market value
Debt mutual funds: 70–80% of market value
The final amount depends on:
Fund volatility
Lender policy
Regulatory guidelines
Market fluctuations may affect available credit limits.
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Interest Rates and Charges
Interest rates are generally lower than unsecured personal loans because it is a secured facility.
Costs include:
Interest rate (floating or fixed)
Processing fees
Pledge marking charges
Penal interest for delays
It works best for short-term needs.
Long-term borrowing increases interest burden.
Advantages of Loan Against Mutual Funds
Key benefits:
No need to sell investments
Avoids capital gains tax
Faster processing
Lower interest than personal loans
Flexible repayment in overdraft models
It protects long-term wealth creation plans.
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Risks and Limitations
LAMF carries specific risks:
Market decline can reduce collateral value
Margin calls if NAV falls sharply
Interest accumulation if repayment is delayed
Restricted transactions on pledged units
If markets fall significantly, lenders may demand additional margin or partial repayment.
Liquidity comfort should not replace financial discipline.
When Should You Consider It?
Suitable scenarios:
Short-term liquidity gaps
Temporary business cash flow needs
Emergency funding
Avoiding premature redemption
Avoid if:
Long-term borrowing is required
You lack repayment clarity
Market volatility is extreme
Discipline in repayment is essential.
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LAMF vs Selling Mutual Funds
Selling units:
Triggers capital gains tax
Breaks compounding
Reduces portfolio size
LAMF:
Keeps investments intact
Provides short-term liquidity
Adds interest cost
The decision depends on duration and urgency of need.
Conclusion
A loan against mutual funds offers liquidity without disrupting long-term investments.
It is efficient for short-term funding but risky if misused.
Market volatility and repayment discipline must be carefully assessed.
Used strategically, it can be a smart financial bridge.
FAQ
Q1. Is loan against mutual funds better than a personal loan?
Usually yes, because it is secured and offers lower interest rates.
Q2. Do I lose ownership of my mutual funds?
No. The units are pledged but remain in your name.
Q3. What happens if markets fall?
You may receive a margin call and be asked to repay part of the loan.
Q4. Is there capital gains tax in LAMF?
No, because you are not selling the units.
Q5. Can I continue SIP in pledged funds?
Yes, but pledged units cannot be redeemed until the loan is cleared.
Q6. Is LAMF suitable for long-term borrowing?
No. It is best suited for short-term liquidity needs.
Citations
Reserve Bank of India Lending Guidelines
SEBI Mutual Fund Regulations
Leading Indian Bank LAMF Policy Documents
AMFI Investor Education Material
Financial Planning Standards Board India Reports
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