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.
How to Apply for a Loan Against Mutual Funds on My SIP Units on smallcase?
Here is how you can apply for a loan against mutual funds on smallcase:
- Log in to smallcase Credit: Visit smallcase Credit and select Against Mutual Funds to check your credit limit.
- Check Eligible Funds: View eligible mutual fund holdings available for pledging.
- Select Funds to Pledge: Choose the funds you want to use 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.
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.
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.
| Fund Type | Typical LTV (Indicative) | Example |
|---|---|---|
| Equity Mutual Funds (SIP units) | Up to 50% of the current NAV | 500 units of an equity fund at Rs 200 NAV = Rs 1,00,000. At 50% LTV → credit limit of Rs 50,000 |
| Debt Mutual Funds (SIP units) | Up to 80-90% of current NAV | 500 units of a debt fund at Rs 200 NAV = Rs 1,00,000. At 80% LTV → credit limit of Rs 80,000 |
| ELSS SIP units (post lock-in) | Up to 50% of current NAV (equity rate applies) | Same as equity; lock-in must have expired for each unit |
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.
Note: LTV ratios are indicative and vary by lender. On smallcase, equity MFs attract a 45% LTV and debt MFs attract a 75% LTV (max LTV 85%). Verify the applicable ratio with your lender before applying.
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 until the lien is released |
| New SIP-generated units are not covered by the existing lien and accumulate freely | You cannot partially unpledge individual units while the loan is active (varies by lender) |
| 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 | Pledged units 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 until you repay and close the loan.
Lien Marking on SIP Units: How It Works?
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. The lien is released when the loan is fully repaid, and the lender sends a release request to the RTA or depository.
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.
LAMF on SIP Units on smallcase
On smallcase, SIP-accumulated units are eligible for LAMF, provided the fund scheme is on the approved list. The platform supports funds registered with both CAMS and KFintech. When you import your holdings, the app fetches all eligible units, including those from SIP folios, and calculates the credit limit based on current NAV.
| Parameter | Detail |
|---|---|
| Eligible SIP units | Non-dematerialised units registered with CAMS or KFintech; demat units held through Zerodha |
| LTV on equity funds | 45% of the current market value |
| LTV on debt funds | 75% of current market value (max LTV 85%) |
| ELSS SIP units | Eligible only after the individual instalment’s 3-year lock-in has expired |
| Minimum loan amount | Rs 25,000 |
| Interest rate | Starting at 9.99% p.a. on the outstanding drawn amount |
| SIP continues during the loan | Yes, the new SIP instalments are not affected by the lien on existing units |
| Partial unpledging | Not available. All units are released only on full loan closure |
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, it’s important for the borrowers to review the LTV limit, interest rate, charges, repayment terms, lien rules, and the risk of forced liquidation if the fund value falls. Explore the loan against mutual funds on Smallcase. Import your holdings in the app to see your eligible credit limit without commitment to proceed.
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 About Loans 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 with CAMS or KFintech, or demat 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.
No, the 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 based on the current NAV of the specific units you pledge, multiplied by the Loan-to-Value (LTV) ratio for that fund type. For equity SIP units, the typical LTV is up to 50% of current NAV. For debt SIP units, it is up to 80-90%. The credit limit fluctuates daily as the NAV changes.
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, the 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 the loan is closed.
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.
