What Is a Loan Against Mutual Funds?

A Loan Against Mutual Funds (LAMF) is a secured lending facility where you pledge your mutual fund units as collateral to a bank or NBFC, in exchange for funds — without having to redeem your investments. It falls under the broader category of Loans Against Securities (LAS), alongside loans against shares, bonds, and insurance policies.

The core idea is simple: instead of selling your mutual fund holdings to raise cash — which stops your money from growing and can trigger capital gains tax — you keep your units invested and simply borrow against their value, repaying the loan later.

How LAMF Actually Works

1. Choose your mutual fund units to pledge. Most banks and NBFCs maintain an approved list of eligible schemes. Note that ELSS (tax-saving) funds and other funds under a lock-in period are generally not eligible, since they can't be freely pledged or liquidated during the lock-in.

2. The lender places a lien on your units via your fund's Registrar and Transfer Agent (RTA) — typically CAMS or KFintech. You authorise this lien-marking through an OTP-based process.
3. You continue to own the units during the loan tenure — you still receive dividends, and the units keep participating in any market gains (or losses) — but you cannot sell, switch, or use them for an SWP/STP until the lien is released.
4. The loan is disbursed as an overdraft facility, not a lump-sum term loan. You draw funds as needed, up to your sanctioned limit, and pay interest only on the amount actually drawn — not the full sanctioned limit.
5. Repayment is flexible. Most facilities require only monthly interest payments, with the principal repayable at the end of the tenure, or earlier at your discretion, without penalty in most cases.
6. Loan tenure is commonly around 1 year, renewable annually based on your repayment track record, though some digital lending platforms structure facilities running up to several years.

Loan-to-Value (LTV) Ratio: How Much You Can Borrow

Your borrowing limit depends on the type of mutual fund you pledge, since debt funds are considered less volatile than equity funds:

Fund Type	Typical LTV Range
Equity mutual funds	Up to 50–75% of NAV
Hybrid mutual funds	50–65%, depending on equity-debt mix
Debt mutual funds (liquid, short duration, gilt)	Up to 75–90% of NAV

As a general reference point, the RBI has historically capped equity mutual fund LTV at 75%, while leaving debt fund LTV limits more flexible for individual lenders to set. Following an RBI revision in February 2026, regulatory LTV caps for mutual fund-backed loans were raised further, giving investors somewhat greater borrowing headroom than before — though individual lenders may still apply more conservative internal limits within these enhanced caps. It's worth checking your specific lender's current LTV policy, since this varies meaningfully across banks, NBFCs, and digital lending platforms.

Example: If you pledge equity fund units worth ₹10 lakh at a 70% LTV, your credit limit would be ₹7 lakh. Pledge the same value in liquid debt funds at 85% LTV, and your limit rises to ₹8.5 lakh.

Interest Rates and Charges

As of mid-2026, LAMF interest rates broadly range from 8% to 13% per annum, with equity fund-backed loans generally priced somewhat higher than debt fund-backed loans, given the higher underlying volatility. On top of interest, most lenders charge a processing fee of roughly 0.25% to 1% of the loan amount, sometimes structured as a flat fee instead.

An Important Regulatory Update: The ₹1 Crore Aggregate Cap

The RBI has set a cap of ₹1 crore per person across all Loans Against Securities, aggregated across every lender in the country — not just per loan or per bank. This rule, originally slated for April 1, 2026, was pushed to July 1, 2026 after banks requested more implementation time. If you're borrowing significant sums against securities across multiple lenders, this aggregate limit is worth factoring into your planning.

Key Benefits of Loan Against Mutual Funds

1. You don't have to break your investments. This is the central advantage — your mutual fund units stay invested and continue compounding (and remain eligible for any dividends), rather than being liquidated to raise cash.

2. No capital gains tax trigger. Since you aren't redeeming your units, there's no capital gains event — a meaningful advantage if your funds have appreciated significantly and a sale would otherwise trigger a tax liability.

3. Faster and often cheaper than unsecured credit. Because the loan is secured by your mutual fund units, approval tends to be quicker than an unsecured personal loan, and interest rates are typically well below personal loan rates (often 14–30% per annum), potentially saving a meaningful amount over even a short borrowing period.

4. Accessible even with a modest credit score. Since lenders primarily rely on the pledged collateral's value, LAMF can be more accessible to borrowers with a less-than-ideal CIBIL score than a comparable unsecured loan — though lender-specific eligibility norms still apply.

5. Interest-only repayment flexibility. Since most LAMF facilities are structured as an overdraft, you can choose to pay only the interest component monthly and settle the principal at the end of the tenure (or earlier), which helps manage short-term cash flow without a fixed EMI burden.

6. You can increase your credit limit by pledging more units. If you need additional funds, you can generally top up your existing facility by pledging more mutual fund units, rather than applying for an entirely fresh loan.

Key Risks to Keep in Mind

• Margin call risk: If the market falls and your pledged fund's NAV drops significantly, your outstanding loan may exceed the permitted LTV against the reduced value. The lender can then ask you to pledge additional units or repay part of the loan.
• Opportunity cost during the lien period: Pledged units can't be switched, redeemed, or used for an SWP/STP until the lien is released — potentially causing you to miss a rebalancing window.
• Interest accumulates if only paying interest. Since there's no forced monthly principal repayment, if you consistently pay only the interest, the principal — and therefore the overall cost — doesn't reduce over time.
• Floating rate exposure: Many LAMF products carry floating interest rates linked to the lender's benchmark rate, meaning your borrowing cost can rise in a rising rate environment.

Frequently Asked Questions (FAQs)

Q1. Can I get a loan against ELSS mutual funds?

No. ELSS (tax-saving) funds and other schemes under a lock-in period are generally excluded from LAMF eligibility, since they cannot be freely pledged during the lock-in.

Q2. Do I lose ownership of my mutual fund units when I pledge them?

No. You continue to own the units and receive dividends during the loan tenure — a lien is simply marked against them, restricting sale, switching, or SWP/STP until the lien is released.

Q3. What is the maximum I can borrow against mutual funds?

This depends on the fund type and lender's LTV policy, but is also subject to an overall RBI cap of ₹1 crore per person across all Loans Against Securities, aggregated across all lenders, effective July 1, 2026.

Q4. Can I apply for a Loan Against Mutual Funds directly through CAMS or KFintech?

No. RTAs like CAMS and KFintech only maintain your investment records and facilitate the lien-marking process — you must apply through a bank or NBFC that offers the LAMF facility.

Q5. What happens if the market falls sharply after I've pledged my units?

If your fund's NAV drops enough that your outstanding loan exceeds the permitted LTV against the current value, the lender may issue a margin call, requiring you to pledge additional units or repay part of the loan to restore the required ratio.

Disclaimer: This article is for informational and educational purposes only and does not constitute financial advice. LTV ratios, interest rates, eligible fund lists, and RBI regulations are subject to change and vary by lender. Please verify current terms with your specific bank or NBFC and consult a qualified financial advisor before availing a loan against your mutual fund investments.