Loan Against Mutual Funds: Interest Rates, Fees and Other Charges
The interest rate on a Loan Against Mutual Funds (LAMF) is generally lower than personal loans or credit cards because the loan is secured by mutual fund units pledged as collateral. But the stated interest rate is only part of the picture. Processing fees, demat charges, late payment interest, and other levies all add to the actual cost of borrowing. This article explains how LAMF interest works, what determines the rate, what each charge means and when it applies, and how to calculate the total cost before you borrow.
How LAMF Interest Works?
It is important to understand when interest starts, which amount it applies to, and how repayments affect the total interest payable. Let’s look at how it works.
Interest Is Charged on the Drawn Amount Only
Most LAMF products are structured as an overdraft (OD) credit line. This means the lender sanctions a credit limit based on the value of your pledged funds, but you are not charged interest on the full limit. Interest accrues only on the amount you actually draw, and only for the number of days it is outstanding.
If you are sanctioned a credit limit of ₹1,00,000 but draw only ₹40,000, interest is charged on ₹40,000, not on ₹1,00,000. If you repay ₹20,000 the following week, interest is charged on ₹20,000 from that point onward.
How Interest Is Calculated?
Interest on LAMF is typically calculated daily on the outstanding drawn balance. The formula is:
Daily interest = Outstanding principal x Annual rate / 365
Monthly interest = sum of daily interest charges for the period
Example: ₹1,00,000 drawn at 9.99% p.a. for 30 days = ₹1,00,000 x 9.99% / 365 x 30 = approximately ₹822.
This daily accrual on drawn amount is what makes LAMF structurally different from a term loan, where interest is charged on the full outstanding principal from the disbursement date, typically on a monthly rest basis.
What Determines the Interest Rate on LAMF?
LAMF rates are not uniform. Several factors influence the rate a borrower is offered:
Lender Type: Banks vs NBFCs
Banks typically price LAMF loans linked to their internal benchmark rates, usually the MCLR (Marginal Cost of Funds-Based Lending Rate) or the repo rate, plus a spread. This means rates can change over the loan tenure if the benchmark changes.
NBFCs may offer fixed or floating rates depending on their product structure. NBFC rates can be higher or lower than bank rates, depending on the platform and the lender’s funding cost.
Fund Type: Equity vs Debt
Rates also vary by the type of funds pledged. Equity mutual funds carry higher NAV volatility, which translates to higher risk for the lender. Some lenders price equity-backed loans slightly higher than debt-backed ones, or set stricter LTV ratios for equity funds.
Fixed vs Floating Rates
Borrowers taking a LAMF for a longer tenure should check whether the interest rate is fixed or floating. A floating rate product tracks a benchmark; if the benchmark rises, the monthly interest cost increases. A fixed-rate product locks in the cost for the tenure.
Borrower Profile
Since LAMF is a secured loan, most lenders do not require a minimum credit score. However, some may offer better rates to borrowers with strong credit profiles or existing relationships with the institution. Income level is generally not a factor, as eligibility is collateral-driven.
Interest Rate on Loan Against Mutual Fund on smallcase
On smallcase, LAMF is offered at a rate starting at 9.99% p.a. Interest is charged only on the outstanding drawn amount and not on the full sanctioned credit limit, and accrues daily. It is debited monthly from your linked bank account via auto-debit.
| Interest rate | Starting at 9.99% p.a. |
| Charged on | Outstanding drawn amount only not on the full credit limit |
| Accrual | Daily on outstanding balance |
| Debited | Monthly from the linked bank account on the due date |
| Unused credit limit | No interest charged |
Processing Fee and Other Charges on Loan Against Mutual Fund
The following table summarises all fees applicable to LAMF on smallcase. All rates are as of early 2026 and subject to change. Review your loan agreement for the schedule of charges applicable at the time of signing.
| Charge | Amount | When Applicable |
| Interest rate | 9.99% p.a. on outstanding drawn amount | Monthly, on every day, the drawn amount is outstanding |
| Processing fee | ₹999 or 1% of loan amount (higher of the two), max ₹4,999 + GST | One-time, at loan sanction |
| Late payment interest | 1.5% per month on overdue interest | If monthly interest is not paid by due date |
| Bounce charges | ₹1,200 per instance | If auto-debit for interest fails |
| Demat pledge charges | ₹50 + GST (lender) + ₹32 + GST (Zerodha) per security | Only when demat MF units are pledged; nil for folio-based units |
| Lien invocation charges | 0.02% + ₹5 + GST per demat security (min ₹55, max ₹1,005) | Only if lender liquidates demat units on default or LTV breach |
| Stamp duty | 0.015% on lien invocation value | Only on demat lien invocation |
| Lien removal (post-repayment) | Nil | After full loan closure |
| Lien removal (pre-disbursal cancellation) | Actual processing fee applicable | If cancelled after pledging but before agreement signing |
| Part-prepayment charges | Nil | Not applicable |
| Foreclosure charges | Nil | Not applicable |
| Collection / legal charges (default) | At actuals | Only in case of default requiring recovery action |
All Fees and Charges Explained for Loan Against Mutual Fund
Understanding what each one is, when it applies, and whether it is avoidable helps you assess the full cost before committing.
Processing Fee
A one-time fee is charged at the time of loan sanction. It covers the administrative cost of processing the application, KYC verification, and lien marking. Processing fees vary widely:
- Some lenders charge a flat fee (e.g. ₹999)
- Others charge a percentage of the loan amount (typically 0.5% to 2%, sometimes up to 4%)
- Many cap the fee at a maximum amount (e.g. ₹4,999)
On smallcase: ₹999 or 1% of the loan amount, whichever is higher, up to a maximum of ₹4,999 + GST.
Interest on Outstanding Principal
The primary recurring cost. Charged on the outstanding drawn amount only, calculated daily, and debited monthly from your linked bank account. No interest is charged on the unused portion of the credit limit.
Late Payment Interest
If the monthly interest auto-debit fails or the overdue amount is not paid by the due date, a penal interest rate applies on the overdue amount until it is cleared. This is charged in addition to the regular interest rate. On smallcase: 1.5% per month on overdue interest.
Bounce Charges
Applied when the auto-debit instruction for the monthly interest fails. For example, due to insufficient funds in the linked bank account or a failed ECS mandate. This is a flat per-instance charge. On smallcase: ₹1,200 per bounce.
Demat Pledge Charges
Applied only when demat-held mutual fund units are pledged (as opposed to folio/SOA-based units). The charge is levied per ISIN (per unique security) per pledge request and not per unit. It is typically split between the lender and the depository participant.
On smallcase: ₹50 + GST (lender) + ₹32 + GST (Zerodha) per demat security. Not applicable if you pledge non-demat (CAMS or KFintech folio-based) units.
Lien Invocation Charges
Applicable only when the lender liquidates (sells) the pledged mutual fund units, either due to an LTV breach that was not resolved, a default on repayment, or non-repayment at tenure end. This is a worst-case charge that applies to demat-held units.
On smallcase: 0.02% + ₹5 + GST per demat security (minimum ₹55, maximum ₹1,005 per security).
Lien Removal Charges
The charge for releasing the lien on pledged units. In most LAMF products:
- Lien removal after full loan repayment: nil
- Lien removal if the application is cancelled after pledging but before disbursement: the actual processing fee may be levied
On smallcase: lien removal after loan closure is free. If you cancel after pledging but before signing the agreement, the actual processing fee applies.
Stamp Duty
A regulatory levy on certain financial transactions. For LAMF, stamp duty applies on the lien invocation value, i.e., when the lender liquidates demat securities. The rate is 0.015% of the lien invocation value on smallcase. This charge is not applicable to non-demat pledges.
Collection and Legal Charges
Applied in cases of default where the lender needs to initiate recovery proceedings. Charged at actuals (i.e., the actual costs incurred). This is a last-resort charge relevant only if a loan becomes non-performing.
What Does a LAMF Actually Cost?
Let’s see an example that uses actual smallcase product terms (as of early 2026) and corrected LTV ratios.
| Parameter | Value |
| Mutual fund portfolio pledged | ₹5,00,000 in equity mutual funds |
| LTV (equity funds on smallcase) | 45% |
| Eligible credit limit | ₹2,25,000 |
| Amount drawn | ₹1,00,000 |
| Interest rate | 9.99% p.a. |
| Tenure of draw | 6 months (182 days) |
| Interest cost | ₹1,00,000 x 9.99% / 365 x 182 = approximately ₹4,981 |
| Processing fee (one-time at sanction) | ₹999 + GST = approximately ₹1,179 |
| Total cost for 6-month draw of ₹1,00,000 | Approximately ₹6,160 (interest + processing fee) |
| Remaining credit limit (unused) | ₹1,25,000 and no interest charged on this amount |
To Wrap It Up….
The stated interest rate is the largest cost component in a LAMF, but not the only one. Processing fees, demat pledge charges, and penal interest on late payments all contribute to the effective borrowing cost. For borrowers who draw the full credit limit and hold it for an extended period, the processing fee becomes a relatively small portion of the total cost. For short-term, smaller draws, it is proportionally more significant.
On smallcase, the rate starts at 9.99% p.a. on the outstanding drawn amount with no foreclosure or prepayment charges. Always review the full schedule of charges in the loan agreement before signing, and use the APR (not just the stated rate) to compare products across lenders. You can review your eligible credit limit and applicable charges for a smallcase Loan Against Mutual Funds before applying.
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
Frequently Asked Questions on LAMF Processing Fee and Interest Rate
LAMF interest rates typically range from around 9% to 15% p.a. across banks and NBFCs in India, depending on the lender, fund type, and borrower profile. On smallcase, the rate starts at 9.99% p.a. on the outstanding drawn amount. Rates are subject to change; verify with the lender at the time of application.
Interest is calculated on a daily basis on the outstanding drawn amount, not on the full sanctioned credit limit. If you draw ₹50,000 from a ₹1,00,000 credit limit, interest accrues only on ₹50,000. The monthly debit is the sum of daily interest charges for the billing period.
No, there are no foreclosure or part-prepayment charges on smallcase. You can repay the loan in full or in part at any time. Interest stops accruing on the repaid amount from the date of repayment.
If the monthly interest auto-debit fails, a bounce charge of ₹1,200 per instance applies. Additionally, a penal interest of 1.5% per month is charged on the overdue interest amount until it is cleared.
Demat pledge charges apply only if you are pledging mutual fund units held in a demat account. On smallcase, this is ₹50 + GST (lender) and ₹32 + GST (Zerodha) per security pledged. If your mutual fund units are in non-demat (folio/SOA) form registered with CAMS or KFintech, these charges do not apply.
The stated interest rate reflects only the interest component. The Annual Percentage Rate (APR) includes the interest rate plus upfront fees such as the processing fee, stamp duty, and GST on charges, spread over the loan tenure. The APR is always higher than the stated rate. For larger loan amounts held longer, the gap between APR and stated rate narrows.
This depends on the lender. Bank-offered LAMF products are often floating rate, linked to MCLR or the repo rate, meaning the rate can change if the benchmark changes during the loan tenure. NBFC products may be fixed or floating. It’s important to confirm the rate type with your lender before signing the agreement.
LAMF is a secured loan because mutual fund units are pledged as collateral. This lowers the lender’s risk compared with an unsecured personal loan, where no asset is pledged. Due to this, LAMF interest rates are generally lower than personal loan rates.
