5 Things to Know About Loans Against Mutual Fund Investments

Mutual fund investments are widely regarded as effective tools for long-term wealth generation, offering diversification, professional management, and compounding benefits. However, beyond their role in investment planning, mutual funds also serve as valuable financial assets that can be leveraged during times of urgent need. One increasingly popular option for investors is the loan against mutual fund facility. This allows individuals to pledge their mutual fund holdings as collateral to access short-term liquidity without redeeming their units.

For those new to this concept, understanding the mechanics, benefits, and key conditions of such loans is essential. Here are five crucial things every investor should know about loans against mutual fund investments.

1. How a loan against mutual fund works

A loan against mutual fund allows investors to borrow money by pledging their mutual fund units to a lender, typically a bank or a non-banking financial company (NBFC). The pledged units are marked under lien, preventing them from being sold or redeemed during the loan tenure. However, the ownership of the funds remains with the investor, and the investments continue to earn returns as per market performance.

The process has become highly streamlined in recent years, and many lenders now offer fully digital application systems. Once the borrower selects the mutual funds to pledge and completes the verification process, the lien is marked digitally through registrars like CAMS or KFintech. Upon successful lien creation, the loan amount is disbursed to the borrower’s bank account, often within 24 to 48 hours.

Borrowers can choose between a term loan or an overdraft facility. In a term loan, fixed instalments are paid over a defined period. In an overdraft, interest is charged only on the utilised portion of the loan limit, offering greater flexibility.

2. Eligible investors and mutual funds

Before applying, it is important to understand the eligibility criteria for this facility. While different lenders may have slight variations in terms, the basic conditions remain similar across the industry. The loan against mutual fund facility is typically available to:

• Indian residents above 18 years of age
• Individuals holding mutual fund units in their own name
• Investors with mutual fund units registered with approved transfer agents (e.g., CAMS, KFintech)
• Applicants who meet KYC requirements, including submission of valid PAN, Aadhaar, and address proof

Mutual fund types eligible for pledging include:

• Debt mutual funds: Preferred by lenders due to lower volatility and predictable performance
• Equity mutual funds: Accepted with a lower loan-to-value ratio due to higher market risk
• Hybrid funds: Considered depending on their composition and stability

Funds from reputed asset management companies (AMCs) with strong historical performance are more likely to be approved for pledging.

3. Loan-to-value ratio and disbursal amount

The loan-to-value (LTV) ratio is a key concept that determines the amount of loan that can be sanctioned against the pledged mutual fund units. This ratio is calculated as a percentage of the current market value of the mutual fund portfolio.

Typical LTV ratios are:

• Debt funds: Up to 70 percent of the current value
• Equity funds: Between 50 percent and 60 percent, depending on volatility

For example, if an investor pledges 10 lakh worth of equity mutual funds, they may receive a loan of 5 lakh to 6 lakh. The same amount in debt funds may yield a loan of up to 7 lakh. LTV ratios are subject to change based on market fluctuations and lender policies. A sharp fall in fund value may trigger a margin call, requiring the borrower to pledge additional units or partially repay the loan.

4. Loan against mutual funds interest rate and other charges

The loan against mutual funds interest rate is one of the biggest factors determining the cost of borrowing. Since this is a secured loan, the interest rates are generally lower than those of personal loans or credit cards. Rates may vary based on fund type, borrower profile, loan tenure, and market conditions.

Typical interest ranges include:

• Debt fund loans: 8 percent to 11 percent per annum
• Equity fund loans: 10 percent to 13 percent per annum

In addition to the interest rate, borrowers should be aware of other charges that may be applicable:

• Processing fees: Usually 0.5 percent to 2 percent of the sanctioned amount
• Lien marking fees: Nominal charges levied by the transfer agents
• Renewal fees: Applicable for overdraft facilities upon annual renewal
• Prepayment or foreclosure charges: Generally waived by most lenders

Borrowers are advised to compare total costs across lenders and not rely on interest rates alone when selecting a loan provider.

5. Strategic benefits of choosing a loan over redemption

One of the most compelling reasons investors choose a loan against mutual fund over direct redemption is the ability to retain their investment position. This option proves particularly beneficial in volatile or declining markets, where redeeming units may lock in losses.

Advantages of opting for a loan include:

• Continued investment growth: Since the units remain invested, potential returns from market appreciation are not lost
• Tax efficiency: Pledging units does not trigger capital gains tax, unlike redemption
• Preservation of long-term goals: Financial plans such as retirement or child education remain on track
• Lower borrowing cost: The interest is generally more affordable than unsecured loans
• Speed and convenience: Quick disbursal, minimal paperwork, and digital processing make it ideal during emergencies

This facility is especially useful for business owners needing working capital, salaried professionals facing a temporary cash crunch, or investors looking to capitalise on another investment opportunity without disturbing their current mutual fund portfolio.

Conclusion

A loan against mutual fund is more than just a borrowing option — it is a smart financial tool that allows investors to access liquidity without disrupting long-term investment goals. By understanding how the process works, evaluating eligibility, and comparing lenders on the basis of interest rates and charges, investors can make informed decisions. As awareness grows and digital platforms simplify access, this type of secured loan is set to become an integral part of personal finance strategies for both new and seasoned mutual fund investors.