Need Cash? Here’s How You Can Borrow Against Your Mutual Funds

When financial emergencies arise, many people feel forced to liquidate their investments to arrange quick cash. Selling mutual funds in such situations might provide instant liquidity, but it also means losing potential future growth, interrupting your investment journey, and sometimes even triggering tax liabilities. 

What if there was a way to access funds without disturbing your portfolio? That’s exactly where a loan against mutual funds (LAMF) comes into play. This article explains how you can get a loan against mutual funds without breaking your investment, the process involved, benefits, risks, and tips for making the most of it.

What Is a Loan Against Mutual Funds?

A loan against mutual funds is a type of secured loan that allows you to borrow money by pledging your mutual fund units as collateral. Instead of redeeming your mutual fund units, you simply pledge them with the bank or financial institution, which then extends a line of credit or loan facility to you.

Your mutual fund investment continues to remain intact in your demat or folio account, and it keeps growing based on market performance. At the same time, you get access to liquidity whenever you need it.

Why Choose a Loan Instead of Redeeming Mutual Funds?

Selling mutual funds during an emergency may sound simple, but it has hidden costs. For instance:

• You may lose out on future market gains.
  
• If you redeem equity mutual funds within a year, you may face short-term capital gains tax.
  
• Exiting prematurely can break your long-term wealth-building strategy.
  
• Some funds may have an exit load if redeemed early.
  

By opting for a loan against mutual funds, you avoid these drawbacks. Your investments remain intact, and you gain access to immediate liquidity.

How Does a Loan Against Mutual Funds Work?

The process is relatively straightforward:

1. Check Eligibility – Most lenders allow you to pledge both equity and debt mutual funds. However, they assess the type of fund, NAV (Net Asset Value), and your overall portfolio before approving.
   
2. Apply with a Lender – Approach a bank or NBFC (non-banking financial company) that offers loans against mutual funds. Many lenders provide an online facility where you can check eligibility and apply instantly.
   
3. Pledge Your Units – The lender will initiate a pledge request through the NSDL or CDSL (depositories where mutual funds are held). You will need to authorize this pledge.
   
4. Credit Limit Sanctioned – Based on the value of your pledged units and the lender’s loan-to-value (LTV) ratio, you are sanctioned a credit limit. For equity mutual funds, the LTV usually ranges between 50–60%, while for debt funds, it can be around 70–80%.
   
5. Funds Disbursed – The lender may either provide a term loan or a revolving overdraft facility. Once approved, the funds are credited to your account.
   

Key Features of Loan Against Mutual Funds

• Loan Amount: Can range from ₹10,000 to several crores, depending on your portfolio size.
  
• Tenure: Usually flexible, ranging from a few months to several years.
  
• Interest Rate: Lower than unsecured loans like personal loans, since mutual funds act as security.
  
• Repayment Flexibility: Options include paying only interest monthly and principal at maturity, or EMIs.
  
• Quick Processing: Many lenders now offer same-day approvals and disbursals.
  

Step-by-Step Guide to Get a Loan Against Mutual Funds

Here’s a simple, user-friendly roadmap:

Step 1: Evaluate Your Need

Determine how much money you actually need. Borrow only the amount required instead of pledging your entire portfolio.

Step 2: Choose the Right Lender

Compare banks and NBFCs on parameters like interest rates, processing fees, LTV ratio, tenure, and repayment flexibility.

Step 3: Submit Application

Most lenders now offer online applications. You’ll need to provide your PAN, KYC documents, and mutual fund details.

Step 4: Authorize the Pledge

Once the lender raises a pledge request, log in to your demat account or CAMS/KFintech portal to approve it.

Step 5: Loan Disbursal

After successful pledge creation, the loan amount or credit limit will be made available to you.

Benefits of Loan Against Mutual Funds

1. Preserve Investments – Your mutual funds continue to earn returns and participate in market growth.
   
2. Lower Interest Cost – Interest rates are generally lower than personal loans or credit cards.
   
3. Quick Access – Digital processing ensures fast approvals and fund disbursal.
   
4. Flexible Usage – You can use the funds for medical emergencies, education, business, travel, or any personal need.
   
5. Overdraft Facility – Pay interest only on the amount you withdraw, not on the full sanctioned limit.
   
6. No End-Use Restrictions – Lenders don’t usually ask how you intend to use the loan amount.

Risks and Things to Keep in Mind

While loans against mutual funds are convenient, they also come with some risks:

• Market Fluctuations – If the NAV of your pledged funds falls significantly, the lender may ask you to pledge additional units or repay part of the loan.
  
• Repayment Obligation – Even though it’s secured, you must repay the loan on time to avoid your funds being liquidated.
  
• Limited LTV – You won’t get 100% of your portfolio’s value as a loan.
  
• Charges – Be mindful of processing fees, annual charges, and prepayment penalties.
  

When Should You Use a Loan Against Mutual Funds?

A loan against mutual funds makes sense when:

• You need short-term liquidity without disturbing your investments.
  
• You want a cheaper alternative to personal loans or credit cards.
  
• You are confident about repaying on time.
  
• You want to avoid tax liabilities or exit loads.
  

Smart Tips to Maximize Benefits

• Borrow only what you can comfortably repay.
  
• Track your pledged fund’s NAV to avoid margin calls.
  
• Compare lenders before choosing one.
  
• Use the loan for productive purposes, not unnecessary expenses.
  
• Repay early if you receive surplus funds to reduce interest burden.
  

Conclusion

A loan against mutual funds is a smart financial tool that gives you the best of both worlds: you retain your investments while getting access to liquidity. Instead of breaking your portfolio during emergencies, pledging your mutual funds allows you to manage cash flow needs efficiently and cost-effectively.

If used wisely, this facility can help you meet short-term financial requirements without compromising your long-term wealth-building goals. Always ensure that you borrow responsibly, compare lenders, and keep track of your repayment schedule. That way, you can unlock liquidity without sacrificing your financial future.