When and How to Use a Loan Against Mutual Funds?
Financial needs rarely come with advance notice. Whether it’s a medical emergency, a down payment, or a business cash flow gap, when you need funds quickly, selling your mutual fund investments is often the first instinct. But it doesn’t have to be.
A loan against mutual funds (LAMF) lets you borrow against the value of your existing MF portfolio without redeeming a single unit. Your investments stay pledged and fully invested, continue to be exposed to market returns, and you get the liquidity you need, often within hours.
This guide walks you through how to use LAMF effectively, and what to keep in mind before applying.
When to Use LAMF: Common and Smart Use Cases
1. Medical Emergencies
An unexpected hospitalisation or surgery can demand lakhs of rupees within hours. Health insurance helps, but it doesn’t always cover the full cost upfront, and pre-authorisation delays can be stressful.
LAMF gives you a standing credit line that you can draw from the moment you need it. You don’t need to sell investments at potentially unfavourable NAVs, and you sidestep the capital gains tax implications that typically arise on redemption. On smallcase, funds reach your bank account within 2 working hours of application.
Note: Tax implications on redemption depend on your fund type, holding period, and applicable capital gains tax rates. Consult a tax advisor for guidance specific to your situation.
2. Home Purchase: Down Payment and Registration Costs
Home loans typically cover 75–80% of a property’s value. The remaining 20–25%, plus registration fees, stamp duty, and brokerage, comes out of pocket. Arranging ₹10–30 lakh quickly without disrupting your investments is where LAMF fits well.
You can use LAMF to cover:
- Down payment top-up
- Registration and stamp duty
- Interior or renovation costs post-purchase
Since home loan disbursements can be delayed, LAMF acts as a bridge; you repay it once the home loan kicks in or when you have liquidity. No foreclosure charges apply if you close early.
3. Education Fees
Term fees at private colleges, coaching institutes, and overseas universities are often due in lump sums. Education loans are an option, but they take time to process and may not cover all categories of expenses.
LAMF is a faster alternative, especially for parents who have built an MF corpus specifically for their child’s education. You access the corpus temporarily as a loan, let the investments continue compounding, and repay as you receive salary or other income.
4. Business Working Capital
For self-employed individuals and small business owners, short-term working capital needs are frequent, such as vendor payments, inventory, GST outflows, or bridging a receivables gap.
Unsecured business loans typically come at significantly higher interest rates. LAMF, backed by your personal MF portfolio, gives you a credit line starting at 9.99%, a meaningful difference in interest cost over even 3–6 months.
5. Travel: Planned or Unplanned
A family vacation, wedding travel, or a bucket-list trip abroad doesn’t need to be funded by selling long-term investments or by running up a credit card balance.
LAMF works like an overdraft-style credit line. Draw only what you spend, pay interest only on what you’ve used, and repay when convenient, with a minimum withdrawal of ₹1,000. It’s a significantly cheaper option than carrying revolving credit card debt.
How to Apply for LAMF on smallcase
- Log in to smallcase Credit: Visit smallcase Credit and click on Against Mutual Funds to check your credit limit.
- Check eligible funds: View SBI mutual funds and other eligible holdings available for pledging.
- Select funds to pledge: Choose funds as collateral and check the credit limit.
- Link your bank account: Add bank details for disbursement and set up an e-mandate.
- Pledge your mutual funds: Selected units are lien-marked while staying in your folio or demat account.
- Sign the loan agreement: Review, verify with OTP, and sign online.
- Receive the loan amount: The amount is usually credited within 2 working hours after signing.
Check your credit limit today
You can drop off mid-application and resume from where you left off.
Key product details at a glance:
| Loan range | ₹25,000 to ₹5 Cr |
| Interest rate | Starting at 9.99% p.a. (on outstanding amount only) |
| Tenure | Up to 36 months |
| Processing fee | ₹999 or 1% of loan amount (max ₹4,999) + GST |
| Foreclosure charges | NIL |
| Eligible age | 18 – 70 years |
Check your credit limit on smallcase →
What Makes LAMF Different from a Personal Loan?
Before getting into use cases, a quick comparison that puts LAMF in context:
| Factors | Loan Against Mutual Funds | Personal Loan |
| Interest rate | Starting at 9.99% p.a. at smallcase. | 14% – 24% p.a.* |
| Processing time | Within 2 working hours** | 1–3 days |
| Collateral required | Yes (your MF units) | No |
| Continues earning returns | Yes | N/A |
| CIBIL check | No hard check | Yes |
| End-use restriction | None | None |
*Personal loan interest rates are indicative and vary by lender, loan amount, and borrower profile.
**Subject to successful pledge creation and bank processing.
The core advantage: because your MF units back the loan, lenders take on less risk, which means lower interest rates for you, faster approvals, and less paperwork. Checking your credit limit on smallcase does not trigger a hard CIBIL inquiry.
For a detailed comparison, see LAMF vs Personal Loan →
How Does LAMF Work?
When you apply for LAMF, your mutual fund units are pledged, not sold. A lien is marked on your units in favour of Bajaj Finance (the lending partner). The units stay in your demat account or folio and continue to earn returns. Your credit limit is calculated based on the Net Asset Value (NAV) of your funds and the applicable Loan-to-Value (LTV) ratio:
| MF Type | Credit Limit (LTV) |
| Equity mutual funds | 45% of market value |
| Debt mutual funds | 75% of market value (up to 85% max LTV) |
The credit limit depends on the type of fund; equity funds have a 50% LTV, and debt funds have a 75% LTV. So ₹2 lakh in equity funds gives you a ₹1,00,000 limit; ₹2 lakh in debt funds gives you ₹1,50,000.
Once you repay the loan in full, the pledge is released, and you regain full control. Note that partial unpledging is not possible; units are released only on full loan closure.
For everything on eligibility, supported AMCs, and how pledging works: What is LAMF? →
Things to Keep in Mind While Opting for LAMF
LAMF is a useful tool when used for the right reasons. A few things to factor in before you apply:
- Market fluctuations affect your credit limit: The loan limit is tied to the NAV of your pledged funds. If markets fall and your outstanding loan exceeds the allowed LTV, you’ll be notified to repay the excess within 7 days. If not repaid in time, Bajaj Finance may liquidate pledged units to recover the amount. This risk is more pronounced with equity-heavy portfolios.
- Interest accrues even if you don’t repay the principal: LAMF is an overdraft facility; monthly interest is auto-debited on the due date. If a payment bounces, a charge of ₹1,200 applies, plus 1.5% per month on the overdue interest. Set a repayment plan before drawing.
- Not all mutual funds are eligible: ELSS funds with a 3-year lock-in period, already pledged funds, and unlisted schemes are not accepted. However, demat-held MF units are eligible. If your credit limit still shows ₹0, it’s likely because your holdings fall into one of the categories above.
- Partial unpledging is not available: Units are released only when the loan is fully closed. If you anticipate needing to selectively return some of your pledged funds, plan your pledge accordingly.
- LAMF is not a substitute for long-term financial planning: LAMF is a short-term liquidity instrument, generally suited for one-time needs rather than ongoing or discretionary expenses.
To Wrap It Up…
Embrace digital convenience! Unlock quick funds through Loan Against Mutual Funds (LAMF) on smallcase. Get your desired loan while still investing in mutual funds for future reinvestment or building a corpus.
All About Loan Against Securities & Loan Against Mutual Funds on smallcase –
smallcase offers quick and easy disbursement of loans against mutual funds ( LAMF). Explore all about the eligibility criteria, documents required, features, and benefits of a Loan against mutual funds on smallcase
FAQs
The default loan tenure is 36 months (3 years). You can close the loan at any point before this; there are no foreclosure or prepayment charges. At the end of the 36-month tenure, the full outstanding principal must be repaid; if not, Bajaj Finance may liquidate the pledged mutual fund units to recover the amount.
The interest rate on LAMF at smallcase starts at 9.99% p.a. It is calculated monthly using the formula: Outstanding Amount × (Rate ÷ 12) ÷ 100. For example, if you have ₹1,00,000 outstanding at 9.99% p.a., your monthly interest would be approximately ₹833. Monthly interest is auto-debited from your linked bank account on the due date.
Disclaimer: Interest rates are subject to change at the discretion of the lending partner, Bajaj Finance Limited. The rate applicable to your loan will be confirmed at the time of loan sanction. Please review the loan agreement carefully before signing.
Yes. Pledging your mutual fund units does not affect their performance. Your units remain in your demat account or folio and continue to earn dividends and capital appreciation throughout the loan tenure. The lien only restricts you from selling or redeeming the pledged units; it has no bearing on the returns generated by those investments.
Disclaimer: Mutual fund investments are subject to market risks. Returns on pledged funds are not guaranteed and may vary based on market conditions. Past performance is not indicative of future results.
Your credit limit is calculated as a percentage of your fund’s current market value (45% for equity funds, up to 75% for debt funds). If markets fall and the value of your pledged units drops, the outstanding loan amount may exceed the permitted LTV ratio, resulting in an LTV breach.
In such a case, you will be notified to either repay the excess amount or pledge additional eligible units to restore the LTV within limits. You have 7 days to act. If the breach is not resolved within 7 days, Bajaj Finance Limited may liquidate a portion of your pledged mutual fund units to recover the shortfall.
Example: If you pledged equity MFs worth ₹1,00,000 and have ₹45,000 outstanding (45% LTV), and the fund value drops to ₹90,000, the permitted outstanding becomes ₹40,500. You would need to repay ₹4,500 to bring the balance back within the allowed limit.
Disclaimer: Liquidation of pledged units is carried out by the lending partner, Bajaj Finance Limited, as per the loan agreement terms. smallcase is not responsible for any losses arising from such liquidation. The value realised on liquidation may be lower than the current NAV, depending on market conditions at the time of sale.
Thousands of schemes across equity, debt, and hybrid categories are eligible, subject to Bajaj Finance’s approved list. The following are not eligible:
– ELSS (Equity Linked Savings Scheme) funds that are within the mandatory 3-year lock-in period
Funds already pledged with another lender
– Unlisted or unapproved schemes not on Bajaj Finance’s eligible list
If your credit limit shows ₹0, it typically means your holdings are in one or more of these ineligible categories. To check your eligible holdings accurately, ensure all email IDs and phone numbers linked to your MF folios are entered at the time of import.
LAMF on smallcase functions like a revolving credit line (overdraft facility). Once your credit limit is sanctioned:
– You can withdraw any amount from the credit line, with a minimum withdrawal of ₹1,000.
– Interest is charged only on the amount withdrawn, not the full limit.
– You can repay principal at any time using the ‘Repay Cash’ option on the Loan Dashboard.
– Once you repay the principal (fully or partially), your credit line is restored by that amount.
– You can withdraw again from the restored limit without reapplying or going through a fresh approval process.
– There are no charges for part-prepayment or foreclosure.
No. Checking your credit limit or submitting a LAMF application on smallcase does not involve a hard CIBIL inquiry and will not affect your credit score. However, if you default on interest payments or the loan is not repaid by the end of the tenure, this may be reported to credit bureaus and could impact your credit score.
Here is a complete breakdown of fees applicable to LAMF via smallcase:
– Interest rate: Starting at 9.99% p.a., charged on outstanding principal only.
– Processing fee: ₹999 or 1% of the loan amount, whichever is higher, capped at ₹4,999 + GST.
– Demat pledge charges: ₹50 + GST from Bajaj Finance, plus ₹32 + GST from Zerodha, per security pledged.
– Late payment interest: 1.5% per month on any overdue interest amount.
– Bounce charge: ₹1,200 per instance of a failed auto-debit.
– Part-prepayment and foreclosure: NIL. You can repay in part or close the loan at any time without additional charges.
– Lien removal after loan closure: NIL.
– Lien removal for pre-disbursal cancellation: The actual processing fee applies if you cancel after the pledge is created but before disbursement.
Disclaimer: Charges are subject to revision by Bajaj Finance Limited and may change without prior notice. Please refer to the loan agreement and the fees & charges section on smallcase for the most up-to-date information before applying.
Yes. You can close the LAMF at any time during the tenure with zero foreclosure charges. To initiate closure, repay all outstanding principal and any accrued interest, then raise a closure request from the Loan Dashboard on the smallcase app or contact support. Once all dues are cleared, the lien on your pledged mutual fund units will be removed, and your full portfolio access will be restored.
No. LAMF on smallcase is currently unavailable to joint mutual fund account holders. Only the sole/primary account holder is eligible to apply. Eligibility is also restricted to resident Indian individuals (salaried or self-employed) aged 18–70 years. Proprietorship concerns, partnership firms, LLPs, private limited companies, and HUFs may be eligible for debt securities funding. Check the eligibility page for details.
You may want to read
Introducing smallcases on ICICIdirect
smallcase Raises $50M in Series D Funding
smallcase raises $40M in Series C Round to scale portfolio investing ecosystem
