Loan against Mutual Funds: Smart Borrowing or Hidden Risk?

There’s a smarter solution called Loan against Mutual Funds (LAMF), a facility which allows you to raise funds without selling your investments.

Life doesn’t always give advance notice. A hospital bill, school fees, or urgent home repairs can catch us off guard. In such moments, quick access to funds becomes a priority. Many investors consider selling their mutual fund holdings for cash. But that often disrupts long-term goals and attracts tax implications.

There’s a smarter solution called Loan against Mutual Funds (LAMF), a facility which allows you to raise funds without selling your investments. By pledging your mutual fund units, you retain ownership and continue to earn potential market returns. More importantly, you avoid triggering capital gains tax.

Loan against mutual funds is a form of secured lending. You pledge your mutual fund units (equity or debt) as collateral. The loan amount depends on the Net Asset Value (NAV) and the fund type. Generally, you can borrow 50–60% of the NAV for equity funds and 80–90% for debt funds.

The final eligibility depends on the fund’s liquidity, volatility, and past performance. Equity funds, being more volatile, usually attract lower loan-to-value (LTV) ratios than debt funds.
Once the loan is sanctioned, the pledged units continue to stay invested. You benefit from any market upside unless you default. Many banks have digitised the process, offering faster approvals and minimal paperwork.

Lenders look at several factors before sanctioning a loan:

Based on this, the bank decides the loan amount, interest rate, and tenure. Riskier funds or poor credit scores will likely mean tighter terms.

The biggest benefit of LAMF is liquidity without liquidation. You get access to cash while your investments remain intact and continue to grow. You also avoid premature exit from long-term goals such as buying a house or funding retirement.
There’s no capital gains tax since you’re not selling your units. And because this is a secured loan, the interest rates are generally lower than those on personal loans. Processing is often quicker too, with many banks offering digital applications and flexible repayment options suited to short-term needs

Personal loan vs loan against mutual funds
The core difference between a personal loan and loan against securities, such as mutual funds, is in collateral and cost. A personal loan is unsecured, easier to access, but lenders charge higher interest rates to offset the risk.

In contrast, loans against securities are secured loans. You pledge your mutual fund units, shares, or bonds. This lowers the lender’s risk and brings down the interest rate, often by a few percentage points. Moreover, you retain ownership of your investments and can benefit from any market upside while tapping into short-term liquidity.

Loans against mutual funds aren’t without risks. A market downturn can lower your NAV. That may lead to a margin call, requiring you to top up the collateral, or the lender may sell part of your units. Here are a few rules to consider regarding these loans:

Loans against mutual funds are best used for short-term needs. Used wisely, they are a great way to unlock liquidity without halting your wealth journey.

Adhil Shetty is the CEO of BankBazaar.com

Life doesn’t always give advance notice. A hospital bill, school fees, or urgent home repairs can catch us off guard. In such moments, quick access to funds becomes a priority. Many investors consider selling their mutual fund holdings for cash. But that often disrupts long-term goals and attracts tax implications.

There’s a smarter solution called Loan against Mutual Funds (LAMF), a facility which allows you to raise funds without selling your investments. By pledging your mutual fund units, you retain ownership and continue to earn potential market returns. More importantly, you avoid triggering capital gains tax.

Loan against mutual funds is a form of secured lending. You pledge your mutual fund units (equity or debt) as collateral. The loan amount depends on the Net Asset Value (NAV) and the fund type. Generally, you can borrow 50–60% of the NAV for equity funds and 80–90% for debt funds.

The final eligibility depends on the fund’s liquidity, volatility, and past performance. Equity funds, being more volatile, usually attract lower loan-to-value (LTV) ratios than debt funds.
Once the loan is sanctioned, the pledged units continue to stay invested. You benefit from any market upside unless you default. Many banks have digitised the process, offering faster approvals and minimal paperwork.

Lenders look at several factors before sanctioning a loan:

Based on this, the bank decides the loan amount, interest rate, and tenure. Riskier funds or poor credit scores will likely mean tighter terms.

The biggest benefit of LAMF is liquidity without liquidation. You get access to cash while your investments remain intact and continue to grow. You also avoid premature exit from long-term goals such as buying a house or funding retirement.
There’s no capital gains tax since you’re not selling your units. And because this is a secured loan, the interest rates are generally lower than those on personal loans. Processing is often quicker too, with many banks offering digital applications and flexible repayment options suited to short-term needs

Personal loan vs loan against mutual funds
The core difference between a personal loan and loan against securities, such as mutual funds, is in collateral and cost. A personal loan is unsecured, easier to access, but lenders charge higher interest rates to offset the risk.

In contrast, loans against securities are secured loans. You pledge your mutual fund units, shares, or bonds. This lowers the lender’s risk and brings down the interest rate, often by a few percentage points. Moreover, you retain ownership of your investments and can benefit from any market upside while tapping into short-term liquidity.

Loans against mutual funds aren’t without risks. A market downturn can lower your NAV. That may lead to a margin call, requiring you to top up the collateral, or the lender may sell part of your units. Here are a few rules to consider regarding these loans:

Loans against mutual funds are best used for short-term needs. Used wisely, they are a great way to unlock liquidity without halting your wealth journey.

Adhil Shetty is the CEO of BankBazaar.com