In this blog, we will explore what a loan against mutual funds is, how it works, its benefits, eligibility, documentation, and the application process.

What is a Loan Against Mutual Funds?

A loan against mutual funds (LAMF) is a type of secured loan where your mutual fund units are pledged as collateral with a bank or a financial institution. The lender grants you a loan amount based on the value of these units, also known as the Net Asset Value (NAV). Typically, you can borrow up to 50%-70% of the fund’s value, depending on the type of fund and lender’s policies.

How Does it Work?

  1. Pledge Mutual Fund Units: You authorize the lender to mark a lien on your mutual fund units.
  2. Loan Disbursal: Based on the NAV and fund type (equity or debt), the lender determines the eligible loan amount.
  3. Continue Ownership: You retain ownership of the mutual fund investment, and it continues to generate returns.
  4. Repayment: You repay the loan in EMIs or as an overdraft, depending on the loan structure.
  5. Lien Release: Once the loan is repaid, the lien is removed, and your units are free again.

Benefits of Taking a Loan Against Mutual Funds

  1. Quick Access to Funds
     Get instant liquidity without selling your investments. Many lenders offer same-day disbursal for eligible applicants.
  2. No Need to Liquidate Investments
     You don’t lose the benefit of compounding returns. Your investment stays intact and may continue to grow.
  3. Lower Interest Rates
     Since the loan is secured, the interest rate is generally lower than unsecured personal loans.
  4. Flexible Repayment Options
     Choose between term loans and overdraft facilities based on your financial situation.
  5. Minimal Documentation
     The documentation process is simpler as compared to other types of loans.

Eligibility Criteria

Eligibility may vary slightly by lender, but the general requirements include:

  • You must be an Indian resident aged 21–65.
  • You should hold mutual funds (equity, hybrid, or debt) in demat form or with authorized AMCs.
  • The mutual fund scheme should be approved by the lender.
  • A steady income source helps in approval but is not always mandatory.

Documents Required

  • KYC documents (PAN Card, Aadhaar Card)
  • Mutual Fund holding statement
  • Bank statements (last 3–6 months)
  • Income proof (if required by the lender)
  • Signed loan application form

Note: If your mutual funds are not in demat form, you may need to convert them before applying.

How to Apply for a Loan Against Mutual Funds

Here’s a step-by-step guide:

  1. Choose a Lender
     Select a bank or NBFC offering loans against mutual funds. Compare interest rates, processing fees, and repayment terms.
  2. Submit Application
     Fill out the loan application form and submit necessary documents.
  3. Lien Creation
     You need to authorize the lender to mark a lien on your mutual fund units.
  4. Loan Disbursal
     Upon verification, the loan is disbursed to your bank account.

Some lenders also provide an online portal where you can apply and track the lien status digitally, making the process even smoother.

Things to Keep in Mind

  • Market Risk: If the NAV drops significantly, the lender may ask for additional collateral or partial repayment (margin call).

  • Timely Repayment: Defaulting can lead to forced liquidation of mutual fund units.

  • Fund Type Restrictions: Not all mutual funds are eligible. Some high-risk funds may not be accepted as collateral.

Conclusion

Getting a loan against mutual funds is a smart, fast, and flexible way to meet your financial needs without liquidating your investments. Whether it’s for a medical emergency, business expansion, or a personal need, this option allows you to unlock the value of your assets while keeping your wealth intact. Ensure you understand the terms, interest rates, and repayment schedule before applying.