Understanding Loans Against SIP Units: Can You Get a Loan Against SIPs?
If you invest through a Systematic Investment Plan (SIP), the units you have accumulated over time can be pledged as collateral for a Loan Against Mutual Funds (LAMF). The loan works the same way as with a lump sum investment, where the lender places a lien on the specific units you choose to pledge, and you access a credit line against their current market value. This article explains how SIP units work for LAMF, eligibility rules, lien marking, risks, and key factors to review before applying.
Are SIP Units Eligible for LAMF?
Yes, SIP units can be used as collateral for a loan against mutual funds. Lenders generally treat accumulated SIP units the same as lump sum units. Eligibility depends on the fund’s current market value, scheme type, RTA registration, and whether the scheme appears on the lender’s approved list. The source of investment, SIP or lump sum, usually does not change the eligibility rules. Most banks and NBFCs accept SIP units from eligible open-ended equity, debt, and hybrid mutual fund schemes.
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What Exactly Are You Pledging When You Apply for a Loan Against Mutual Funds?
When you apply for a LAMF, you are pledging the units you have already accumulated, not your future SIP instalments. The lien is placed on a specified number of units as they stand at the time of the application.
Future SIP instalments that arrive after the lien is marked generate new units in the same folio. These new units are not automatically covered by the existing lien; they accumulate freely in your folio and are not pledged unless you specifically request an additional pledge.
This distinction matters: the credit limit is calculated on the units pledged at the time of the application. If you want to increase the credit limit by including more units, you would need to request a top-up pledge with your lender. Top-up availability depends on your lender, so check with your lender before you apply for a top-up.
The ELSS Exception: Each SIP Instalment Has Its Own Lock-in
If you invest in an ELSS (Equity Linked Savings Scheme) through a SIP, the lock-in rule applies per instalment, not to the entire folio.
Each monthly SIP instalment in an ELSS fund has its own independent 3-year lock-in period, counted from the date that specific instalment was invested. An instalment from April 2022 completes its lock-in in April 2025. An instalment from April 2023 completes its lock-in in April 2026.
| ELSS SIP Instalment | Investment Date | Lock-in Expiry | Pledgeable? |
|---|---|---|---|
| Instalment 1 | 1 April 2022 | 1 April 2025 | Yes (from April 2025) |
| Instalment 12 | 1 March 2023 | 1 March 2026 | Yes (from March 2026) |
| Instalment 24 | 1 March 2024 | 1 March 2027 | Not yet |
| Instalment 36 | 1 March 2025 | 1 March 2028 | Not yet |
Only units whose individual lock-in has expired are eligible for pledging, and even then, the specific ELSS scheme must appear on the lender’s approved list. Units still within their lock-in period cannot be pledged under any circumstances, as this is a statutory restriction.
For non-ELSS SIP investments, there is no lock-in. All accumulated units are eligible, provided the scheme is on the lender’s approved list.
How the Credit Limit Is Calculated on SIP Units
The credit limit is based on the current Net Asset Value (NAV) of the specific units you pledge, multiplied by the Loan-to-Value (LTV) ratio applied by the lender to that fund type. Because NAV changes daily, the credit limit fluctuates with the market. If the NAV of your pledged units rises, the eligible limit may increase. If it falls and the drawn amount exceeds the revised eligible limit, an LTV breach occurs.
What Happens to Your SIP While the Loan Is Active?
A common concern among SIP investors is whether pledging accumulated units affects their ongoing contributions, but it does not.
| What continues normally | What is restricted |
|---|---|
| Monthly SIP debits continue, new units accumulate in your folio as scheduled | Pledged units cannot be redeemed, sold, or switched while they are under lien |
| New SIP-generated units are not covered by the existing lien and accumulate freely | You can unpledge units only to the extent you have repaid the loan |
| NAV appreciation on pledged units accrues to you; you retain ownership | If the lender requires it, additional units may need to be pledged to resolve an LTV breach |
| Dividends (IDCW payouts) continue to be credited to your bank account | Units you have not unpledged remain under lien until the loan is fully repaid and the lender releases the lien |
In short, the SIP keeps running, the new units are yours, and the existing pledged units stay under lien. You can unpledge part of them to the extent you have repaid the loan, and the rest are released once the loan is fully repaid.
Lien Marking on SIP Units: How Does It Work?
When you apply for LAMF, the lender sends a lien request to the Registrar and Transfer Agent (RTA) for the specific units in your folio. The RTA marks the lien digitally and sends confirmation to both the lender and the investor.
The lien applies to the number of units, not a rupee amount. For example, if you pledge 500 units of a fund at ₹200 NAV, those 500 units remain under lien even if the NAV later rises to ₹250 or falls to ₹170. The credit limit changes because the lender recalculates it based on the current NAV of the pledged units.
For SIP units held in demat form, the pledge is created through the depository, either NSDL or CDSL, rather than through the RTA. The process works similarly, but the route is different. As you repay, you can unpledge units to the extent of the repayment; the lender sends the release request to the RTA or depository, and the full lien is released once the loan is repaid.
Risks Specific to SIP-Backed Loans
- NAV Fluctuation and LTV Breach: SIP units in equity funds move with the market. If the NAV of pledged units falls, the credit limit also reduces. If the borrowed amount exceeds the revised eligible limit, the lender may issue a margin call. The borrower may need to repay the shortfall or pledge more eligible units within the given timeline.
- Lock-in Risk for ELSS SIP Investors: ELSS SIP units have a separate 3-year lock-in for each instalment. This means only units that have completed their lock-in may qualify to pledge. Recent ELSS SIP investments may not add to the credit limit if most units are still locked in.
- Future Instalments Are Not Covered: The lien applies only to the units pledged at the time of application. Future SIP instalments in the same folio are not automatically added as collateral. These new units may be used later to increase or restore the credit limit, but the borrower must make a separate request to the lender.
To Wrap It Up…
SIP units are eligible for LAMF under the same conditions as lump-sum units. The fund scheme must be on the lender’s approved list, the units must be in an eligible holding format, and ELSS units must have completed their individual 3-year lock-in.
Before applying, borrowers should review the LTV limit, interest rate, charges, repayment terms, lien rules, and the risk of forced liquidation if the fund value falls.
Disclaimer: This article is for educational and informational purposes only and should not be considered financial, investment or lending advice. Loan eligibility, approval, interest rates, credit limits, charges and other terms are subject to the lender’s policies, applicable regulations and the value of the securities pledged. Please review the applicable loan agreement, terms and conditions, and associated risks carefully before borrowing. If you are considering a Loan Against Mutual Funds, you can learn more about our LAS and LAMF offerings in detail at the help centre.
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Frequently Asked Questions on Loan Against SIP Units
Yes, the units accumulated through a SIP are eligible for LAMF under the same conditions as lump sum units. The fund scheme must be on the lender’s approved list, the holding format must be accepted (non-demat units held with Mutual Fund Companies, or demat units held with an eligible depository participant), and any ELSS units must have completed their 3-year lock-in.
No, only units you have already accumulated can be pledged. Future SIP instalments that arrive after the lien is marked generate new units in your folio, but these are not automatically covered by the existing pledge. They accumulate freely and can be added to the pledge via a top-up request, subject to the lender’s policy. Top-up availability depends on your lender, so check with your lender before you apply for a top-up.
No, pledging accumulated units does not affect your monthly SIP contributions. The auto-debit for your SIP continues as scheduled, and the new units generated by future instalments are not subject to the lien. Your SIP and its compounding continue uninterrupted.
The credit limit is generally based on the current market value of the eligible mutual fund units accumulated through your SIP, not on the SIP amount you invest each month. The lender applies the permitted loan-to-value ratio to the value of the units you choose to pledge. If the NAV falls, the available credit limit can also reduce.
For example, if eligible pledged units are worth ₹10 lakh, the available limit will depend on the applicable LTV for that fund category and the lender’s terms.
Only if the specific units have completed their mandatory 3-year lock-in period. Each SIP instalment in an ELSS fund has its own independent 3-year lock-in counted from the date of that instalment’s investment. Units still within their lock-in cannot be pledged. After the lock-in expires, eligibility also depends on whether the ELSS scheme appears on the lender’s approved list.
If the NAV falls and the drawn loan amount exceeds the permitted LTV ratio, the lender will issue a margin call. You will be required to either repay the excess or pledge additional units within the stipulated timeframe. If the shortfall remains unresolved, the lender may sell a portion of the pledged units to recover the shortfall. This forced sale is treated as a redemption and may trigger capital gains tax.
No, pledging is not a sale or redemption. No capital gains tax is triggered at the time of pledging. The holding period for each unit begins on its original purchase date. Capital gains tax applies only if the lender liquidates units due to a default or when you voluntarily redeem units after they are unpledged.
Yes, you retain ownership of pledged units. Any NAV appreciation accrues to you, and IDCW (dividend) payouts continue to be credited to your registered bank account. You cannot, however, redeem or switch the pledged units while the lien is active.
No, you do not need to stop or pause your SIP. The lien is placed only on the specific units pledged at the time of application. Your monthly SIP debit continues normally and generates new units that sit outside the pledge.
