What Is a Loan Against Mutual Funds and How Does It Work in India
Compounding in mutual funds is one of the most powerful wealth-building forces for Indian investors — but most people break it without realising it. Over 8,000 mutual fund schemes in India are eligible for pledging as loan collateral, yet most investors still redeem their units during emergencies, permanently stopping the compounding on those units.”
“Are you one of them, or have you already looked into what is loan against mutual funds?”
“No matter what, you are at the right place. This guide walks you through how a loan against mutual funds works — so you’re compounding in mutual funds never has to stop again.
What Is a Loan Against Mutual Funds?
A loan against mutual funds (LAMF) is a secured loan where your mutual fund units serve as collateral.
- You pledge your units to a lender
- The lender places a lien on them
The units stay in your folio and they continue earning returns. Plus, your SIPs run as usual. In return, you get a credit line that you can withdraw from as needed. You pay interest only on the amount you actually use.
Which Mutual Funds Can Be Pledged?
Every fund type is treated differently. Here’s a quick breakdown:
Eligible:
- Large-cap, flexi-cap, multi-cap, and index equity funds
- Debt and liquid funds
- Hybrid and balanced advantage funds
- Most open-ended schemes from SEBI-registered AMCs
Not eligible:
- ELSS funds still under the 3-year lock-in period
- Close-ended funds that haven’t matured
- Funds with a total value below ₹50,000 (varies by lender)
- Some lenders exclude sectoral and thematic funds due to high volatility
Your funds must be registered with either CAMS or KFintech, the two registrar and transfer agents that handle lien marking digitally in India.
How Does the Loan Structure Work?
LAMF operates as an overdraft facility. The lender calculates your credit limit based on the current NAV of your pledged funds and applies a loan-to-value (LTV) ratio.
| Fund Type | LTV Ratio | ₹10 Lakh Portfolio Gets You |
| Equity funds | Up to 50% | ₹5 lakh credit limit |
| Debt funds | Up to 80% | ₹8 lakh credit limit |
| Hybrid funds | ~60% | ₹6 lakh credit limit |
The lien is marked digitally through CAMS or KFintech. Once the facility is active, you can withdraw up to your limit and repay on your own schedule.
Understanding how loan against mutual funds works in India starts with this overdraft structure, because it behaves very differently from a traditional term loan.
What Are the Costs Involved?
| Cost Component | Typical Range |
| Interest rate | 9%–13% p.a.* |
| Processing fee | ₹500–₹2,000 + GST |
| Lien marking charges | Usually nil |
| Foreclosure charges | 0–2% |
| Stamp duty | As applicable per state |
Liquify offers this at 9.3% p.a.*, with a minimal processing fee & zero foreclosure charges.
How Is This Different from Redeeming Your Mutual Funds?
| Factor | Redemption | Loan Against Mutual Funds |
| Tax impact | LTCG at 12.5% above ₹1.25 lakh [Section 112A] | Zero |
| Compounding | Stops on redeemed units | Continues on all units |
| Time to access funds | 1–3 working days | Within 24 hours |
| SIP continuity | Broken | Unaffected |
| Reversibility | Permanent | Fully reversible on repayment |
Redemption is a one-way decision. Once you sell those units, the compounding on them is gone forever. On the contrary, a loan is temporary. You repay, the lien lifts, and your portfolio is exactly where it was.
When Should You Consider This?
How loan against mutual funds works in India is worth understanding for anyone who holds mutual funds and may face a large expense.
Common use cases include:
- Medical emergencies requiring ₹1–10 lakh within 24 hours
- Wedding expenses that arrive in phases over several months
- College and education fees with semester deadlines
- Business working capital needs for freelancers and early-stage founders
- Short-term cash flow gaps during job transitions
*Interest rates are subject to change based on lender policies, portfolio composition, and market conditions. Visit liquify.in for the latest rates.