What is a Margin Call in Loan Against Securities?
When you take a Loan Against Mutual Funds (LAMF) or a Loan Against Securities (LAS), your loan limit depends on the current value of the investments you pledge. Since mutual funds, stocks, and other securities move with the market, their value can rise or fall after you take the loan. If the value of your pledged securities falls sharply, your loan amount may become higher than the limit allowed by the lender. In such cases, the lender asks you to restore the required margin. This is called a margin call.
Understanding when a margin call can happen, how much time you get to respond, and what the lender may do if you do not respond is important before taking a loan against securities.
What Is a Margin Call?
A margin call is an alert from your lender when the value of your pledged securities falls below the required level for your loan. This can happen when the market value of your mutual funds, stocks, or other pledged securities drops.
In simple terms, the lender asks you to bring the loan back within the allowed Loan-to-Value (LTV) limit. You can usually do this by repaying part of the loan or pledging more approved securities.
A margin call is not a penalty. It happens because LAS and LAMF are linked to market prices. When the value of pledged securities falls, your eligible loan amount also reduces. If the amount you have already used becomes higher than the revised limit, a shortfall is created. Lenders monitor pledged securities regularly and notify borrowers when such a shortfall occurs.
How Does a Margin Call Get Triggered?
The trigger is always the same: the market value of your pledged investments falls enough that your outstanding drawn amount exceeds the permitted LTV ratio.
Step-by-Step Process: From NAV Fall to Margin Call
- When you pledge mutual funds, the lender gives you a credit limit based on the current value of your pledged units and the applicable LTV ratio.
- For example, if your equity mutual fund portfolio is worth ₹2,00,000 and the LTV is 45%, your eligible credit limit is ₹90,000.
- If you use the full ₹90,000 and the market falls, the NAV of your pledged mutual funds may also drop. Suppose the portfolio value falls to ₹1,80,000. The revised credit limit will be: ₹1,80,000 × 45% = ₹81,000
- Your outstanding amount is still ₹90,000, but your revised eligible limit is now ₹81,000. This creates a shortfall of ₹9,000.
- The lender identifies this shortfall during daily revaluation and sends a margin call notification. This means you may need to repay part of the loan or pledge more eligible securities to restore the required margin.
Here is an example for better understanding:
| Parameter | At Sanction | After NAV Fall |
|---|---|---|
| Pledged fund value | ₹2,00,000 | ₹1,80,000 |
| LTV (equity fund) | 45% | 45% |
| Eligible credit limit | ₹90,000 | ₹81,000 |
| Amount drawn | ₹90,000 | ₹90,000 (unchanged) |
| Shortfall (margin call amount) | — | ₹9,000 |
What Are Your Options When You Receive a Margin Call?
When a margin call is issued, you have two ways to resolve the shortfall within the response window specified by your lender:
Option 1: Repay the Shortfall Amount
Pay down the outstanding loan by the exact shortfall amount. This reduces the drawn balance to within the revised eligible limit, resolving the margin call.
In the example above, repaying ₹9,000 brings the outstanding amount down to ₹81,000, exactly matching the revised eligible limit at the new NAV.
Option 2: Pledge Additional Approved Securities
Instead of repaying, you can pledge more eligible mutual fund units, shares, or other approved securities to increase the collateral value, which in turn increases the permitted loan amount back above the outstanding balance.
For the shortfall of ₹9,000 to be covered by additional equity collateral at 45% LTV, you would need to pledge additional units worth at least ₹20,000 (₹20,000 x 45% = ₹9,000).
| Option | What You Do | Effect |
|---|---|---|
| Repay the shortfall | Transfer ₹9,000 to your loan account | Outstanding balance drops below the revised eligible limit |
| Pledge more securities | Add approved MF units or shares as additional collateral | Eligible limit rises back above the outstanding drawn amount |
| A combination of both | Partial repayment + partial additional pledge | Flexible; either or both are valid if the net shortfall is resolved |
What Happens If You Do Not Respond to a Margin Call?
Every lender specifies a response window in the loan agreement, typically 7 to 10 working days from the date the margin call is issued. If you do not resolve the shortfall within this window, the lender is entitled to sell a portion of your pledged securities without further notice.
How Lenders Choose Which Securities to Sell?
Lenders do not sell all your pledged securities, only enough to recover the shortfall. The selection logic varies by lender, but commonly:
- If only mutual funds are pledged, the units with the lowest current NAV are typically sold first, as these require selling the fewest units to raise the required amount.
- If only shares are pledged: shares with the lowest market price per unit are typically liquidated first.
- If both shares and mutual funds are pledged, many lenders prioritise shares over mutual funds, starting with the lowest-priced shares.
The forced sale happens at the prevailing market price or NAV at the time of liquidation, which may be lower than when the margin call was first issued, particularly in a continuing market downturn.
Tax on Forced Liquidation
The forced sale of pledged securities is treated as a redemption for tax purposes. Capital gains tax applies based on the type of security and the holding period from the original purchase date.
- Equity mutual funds or shares held for more than 12 months: LTCG at 12.5% on gains above ₹1.25 lakh in the financial year.
- Equity mutual funds or shares held for 12 months or less: STCG at 20%.
- Debt mutual funds (purchased on or after 1st April 2023): gains taxed at income slab rate regardless of holding period.
The tax liability falls on the borrower and not on the lender. Even though you did not choose to sell, the tax consequence is yours. TDS may also be deducted by the AMC at the point of forced redemption.
How to Reduce the Risk of a Margin Call?
You cannot fully eliminate the risk of a margin call if you hold equity-backed loans as markets move independently of your loan. But you can reduce the likelihood and severity of a margin call through a few practical measures:
1. Do Not Draw the Full Credit Limit
If your eligible limit is ₹90,000, drawing ₹90,000 leaves zero headroom. A small NAV dip immediately creates a shortfall. Drawing only a portion of the limit, say 60-70%, builds a buffer before the margin call threshold is reached.
2. Monitor Your Portfolio Value Regularly
The lender revalues your collateral daily. You should check your loan dashboard periodically, particularly during volatile market periods, so you are not caught off guard by a margin call. Most digital LAMF platforms display the current collateral value, eligible limit, and drawn amount in real time.
3. Keep Liquid Funds Available
A margin call can arise quickly in a market downturn. If you have liquid savings set aside, you can respond by repaying the shortfall immediately rather than arranging funds under time pressure.
4. Pledge a Diversified Pool of Securities
A concentrated pledge, for example, all equity in a single sectoral fund, means all your collateral moves in the same direction during a correction. A more diversified pledge across equity and debt funds tends to be more stable because debt fund NAVs are less volatile.
5. Use Debt Funds Where Possible
Debt mutual funds attract higher LTV (typically 75-80%) than equity funds (typically 45-50%), and their NAVs are less volatile day to day. For borrowers who hold both equity and debt funds, pledging a portion of debt funds can give a larger and more stable credit limit with lower margin call risk.
Margin Call on smallcase (LAMF)
On smallcase, mutual fund collateral is revalued daily based on the current NAV. If the outstanding drawn amount exceeds the eligible limit after revaluation, the platform issues a margin call notification.
| Parameter | Detail on smallcase |
| Daily revaluation | NAV of pledged funds is updated daily; eligible limit recalculates automatically |
| Trigger condition | Outstanding drawn amount > revised eligible limit (LTV applied to current NAV) |
| LTV — equity MFs | 45% of the current market value |
| LTV — debt MFs | 75% of current market value (max LTV: 85%) |
| Response window | 7 days from the date of the margin call notification |
| If unresolved after 7 days | Bajaj Finance may sell pledged units to recover the shortfall amount |
| If the loan is not repaid at the tenure end (36 months) | Pledged funds may also be liquidated at that point |
| How to respond | Repay via the Loan Dashboard (More tab > Repay Cash), or contact support to pledge additional units |
To Wrap It Up…
A margin call is a standard part of how Loan Against Securities (LAS) and Loan Against Mutual Funds (LAMF) work. Since the loan is backed by market-linked assets, any fall in the value of the pledged securities can reduce the eligible loan limit and create a shortfall.
Understanding how margin calls are triggered and the steps required to resolve them can help borrowers manage such situations more smoothly. Regularly tracking the value of pledged investments, maintaining a buffer within the available limit, and keeping some liquidity ready can make it easier to respond if a margin call arises. Explore more about Loan Against Mutual Funds and Loan Against Stocks on smallcase.
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 Margin Call on LAMF
A margin call is a notification from your lender that the market value of your pledged collateral has fallen below the level required to support your outstanding loan. It is a request to restore the LTV ratio either by repaying part of the loan or by pledging additional approved securities.
A margin call is triggered when the drawn loan amount exceeds the revised eligible credit limit after the lender’s daily revaluation of your pledged securities. For example, if you have drawn ₹90,000 against equity funds worth ₹2,00,000 at a 45% LTV (eligible limit: ₹90,000) and the fund value drops to ₹1,80,000 (revised limit: ₹81,000), a margin call of ₹9,000 is issued.
The response window is specified in your loan agreement. It is typically 7 to 10 working days from the date the margin call is issued. On smallcase, the window is 7 days. If the shortfall is not resolved within this period, the lender may sell the pledged securities.
You have two options: repay the shortfall amount to reduce the outstanding loan balance within the eligible limit, or pledge additional approved securities to increase the collateral value and raise the permitted loan amount. A combination of both is also valid. The margin call is resolved as soon as the outstanding drawn amount falls back within the revised eligible limit.
If the shortfall is not resolved within the stipulated timeframe, the lender is entitled to sell a portion of your pledged securities to recover the outstanding excess. This forced sale happens at the prevailing market price or NAV at the time of liquidation. The tax consequences (capital gains tax) fall on you as the borrower.
No, the lender usually sells only enough pledged securities to recover the shortfall amount, not the entire pledged portfolio. The securities selected for sale may vary by lender. Some lenders may prioritise shares over mutual funds, while others may follow their internal liquidation policy.
Yes, a forced sale of pledged securities is treated as a redemption for tax purposes. Capital gains tax applies based on the fund or security type and the holding period from the original purchase date. The tax liability is yours even though you did not initiate the sale. Consult a chartered accountant for your specific tax position.
Draw only a portion of the eligible credit limit rather than the full amount, as this builds a buffer before the shortfall threshold is reached. Monitor your collateral value regularly, especially during volatile markets. Keep liquid funds available to repay quickly if needed. Pledging a diversified mix, including debt mutual funds (which have less NAV volatility), also helps stabilise the credit limit.
