There have been moments when we’ve suddenly needed money, like a medical emergency, an urgent business payment, or an unavoidable personal expense. And sometimes, this happens right when our investments are performing well, making it the worst possible time to redeem or exit. We don’t want to disrupt compounding gains, trigger capital taxes, or sell something that’s growing.
In such situations, most of us turn to credit cards, personal loans, or BNPL platforms. But credit cards come with steep interest rates, personal loans take time to process, and borrowing from people isn’t always comfortable, especially for short-term needs.
In these moments, you can actually avail a loan against your mutual funds. It’s a lesser-known option that can give you short-term liquidity without selling your investments.
Read till the end to understand how it works, the entire process, and whether it’s the right choice for you.
What Is a Loan Against Mutual Funds?
A loan against mutual funds is a secured loan where you pledge your mutual fund units and get immediate liquidity in return. This means you do not redeem or sell your investments. You continue to remain the owner while the lender places a temporary lien on those units. Once you repay the loan, the lien is removed, and your units become free again.
Like other secured lending products, the amount sanctioned depends on the value and type of funds pledged. This is determined through a Loan-to-Value (LTV) ratio, which varies based on the underlying asset:
Debt Mutual Funds
You can typically borrow 60%–70% of the value of debt fund units. For large portfolios, several lenders do not impose a strict upper cap, though this depends on internal lending policies.
Equity Mutual Funds
Equity funds usually offer 50%–60% of the fund value as eligible loan amount.
Since equity funds carry higher volatility, lenders keep the LTV lower compared to debt funds.
Key Benefits of a Loan Against Mutual Funds
This facility is especially useful for short-term financial needs such as emergencies, business expansion, or even strategic tax planning.
- No Redemption Needed: You don’t have to sell your mutual fund units, helping you avoid capital gains tax and the risks of timing the market.
- Quick & Hassle-Free: Loan processing is fast, often within 1-2 business days, with minimal paperwork, typically just KYC documents, fund statements, and bank details.
- Lower Interest & Flexible Repayment: Since this is a secured loan, interest rates are generally lower than personal loans or credit cards.
- Interest Only on Usage: Since it operates like an Overdraft facility, you pay interest only on the amount you actually use and only for the number of days you use it, instead of the entire sanctioned limit.
- Keep Compounding Intact: Your investments continue to grow uninterrupted, making this an ideal solution for long-term SIP investors facing a temporary liquidity crunch.
Eligibility Criteria for Loan Against Mutual Funds
Before approving a Loan Against Mutual Funds (LAMF), lenders check a few basic eligibility points. Though criteria vary across banks/NBFCs, here’s what generally applies:
1. Age
Most institutions allow applicants 18-65 years old, with some extending eligibility beyond 65 based on risk and portfolio value.
2. Employment
Both salaried and self-employed individuals can apply. Income proof may be checked for repayment comfort, but approval is easier since the loan is secured against MF units.
3. Accepted Mutual Funds
Each lender maintains its own list. Usually, the following are eligible:
- Equity funds
- Debt funds
- Hybrid funds
- ELSS (only after lock-in)
Funds with low liquidity or high volatility may be excluded.
4. Loan Amount
Loan limits differ based on the type of fund:
- Minimum amounts may start around ₹20,000
- For equity funds, limits usually go up to ₹10-20 lakh
- For debt funds, limits can go up to ₹10-15 crore
5. KYC & Documents
Basic KYC is needed, like PAN/Aadhar, address proof, and bank details.
Credit score may be checked, but since the loan is secured, a very high score is not always required.
Loan Against Mutual Funds vs. Personal Loan: Key Differences
Features | Loan Against Mutual Funds | Personal Loan |
Collateral Needed | Yes (Mutual funds) | No |
Interest Rate | Generally lower due to collateral | Higher, because these loans are typically unsecured |
Approval Speed | Fast (within 24-48 hours) | 1-3 days typically |
Interest Charged On | Amount used & duration used | Entire sanctioned amount |
Credit Score Requirement | Lower to moderate dependence, since loan is asset-backed | High dependence, major approval factor |
Conclusion
If you ever need urgent money but don’t want to disturb your investments, a Loan Against Mutual Funds can be a smart option. You get liquidity when you need it, your compounding stays intact, and you pay interest only on what you actually use. It’s a practical tool worth keeping in mind for short-term needs.
If you need any help in understanding this process or taking a loan against your mutual funds, Ashvvy Investments can guide you end-to-end so you make the right decision.
