Things To Know About Loan Against Mutual Funds in India
A Loan Against Mutual Funds (LAMF) is a type of secured loan in which you pledge your mutual fund units as collateral to borrow money from a bank or a non-banking financial company (NBFC). You do not need to sell or redeem your units to access funds. LAMF is a sub-category of Loan Against Securities (LAS). While LAS can include shares, bonds, and other financial instruments, LAMF specifically uses mutual fund units as the security.
The key benefit is that your investments remain in the market while you access liquidity. Your units continue to earn returns (subject to market performance) during the loan period, though you cannot redeem or switch them until the loan is fully repaid. If you are considering applying for a loan against your mutual funds, we will cover some important factors to consider before you proceed.
How Does LAMF Work?
When you apply for a Loan Against Mutual Fund(LAMF), the lender asks the mutual fund registrar to place a lien on a specified number of your units. A lien is a legal hold that prevents you from redeeming, selling, or switching the pledged units until the loan is cleared.
Importantly, you retain ownership of the units. The lender only has the right to sell those units if you default on repayment. The mechanism depends on whether your units are held in physical/statement form or in a demat account:
- Statement/folio-based units: The lender submits a lien request to the Registrar and Transfer Agent (RTA). The RTA marks the lien and sends a confirmation to the lender and the borrower.
- Demat-based units: The lender marks the pledge through the depository, either NSDL (National Securities Depository Limited) or CDSL (Central Depository Services Limited).
Once the lien is confirmed, the lender disburses the approved loan amount to your registered bank account. The entire process is digital for most lenders.
How Much Loan Can You Get? LTV Ratios Explained
The loan amount is determined by the Loan-to-Value (LTV) ratio, which is the percentage of a fund’s current market value that the lender is willing to lend. LTV ratios vary by fund type and lender policy.
| Fund Category | Credit Limit (LTV) | Max Loan-to-Value | Example |
|---|---|---|---|
| Equity Mutual Funds | 45% of market value | 45% | Rs 2L in equity MFs → credit limit = Rs 90,000 |
| Debt Mutual Funds | 75% of market value | 85% | Rs 2L in debt MFs → credit limit = Rs 1,50,000 |
| ELSS Mutual Funds (under lock-in) | Not eligible | — | Cannot be pledged during the 3-year lock-in period |
Note: LTV ratios above are specific to loans via smallcase. Ratios may vary across other lenders. Actual credit limit depends on fund eligibility, market value at the time of application, and lender policy.
Loan Amount Range
On smallcase, the minimum loan amount is Rs 25,000. Loan amounts vary based on the market value of your eligible pledged funds. Across lenders, individual borrowers can typically access loans from Rs 10,000 upwards, with limits varying by lender and portfolio value.
Eligibility Criteria to Apply for a Loan Against Mutual Funds
Eligibility requirements vary across lenders. The following criteria are commonly observed:
| Age | 18 to 90 years (varies by lender) | 18 to 70 years |
| Residency | Resident Indian; NRI eligibility varies by lender | Resident Indian |
| Employment status | Salaried or self-employed individuals | Salaried or self-employed |
| KYC | Valid PAN, Aadhaar, and an active bank account linked to the folio | PAN + registered phone/email linked to MF holdings; fully paperless |
| Account type | Individual or joint (varies by lender) | Individual accounts only; joint account holders not eligible |
| Minimum loan amount | Rs 10,000 onwards (varies by lender) | Rs 25,000 |
| Credit score check | Varies; some lenders check credit score | No hard CIBIL check |
Note: Eligibility criteria above reflect general observations and smallcase-specific terms (lender: Bajaj Finance Limited) as of early 2026. Always verify current criteria with the lender before applying.
Mutual Funds that Are Generally Eligible for LAMF
- Open-Ended Equity Mutual Funds: These funds may be eligible if they are part of the lender’s approved list and meet the required LTV rules.
- Open-Ended Debt Mutual Funds: Debt funds are commonly accepted as collateral because they usually have lower volatility than equity funds.
- Hybrid and Balanced Funds: These funds may be accepted if they meet the lender’s eligibility criteria and approved scheme list.
- Liquid Funds: Liquid funds are often accepted because they invest in short-term debt instruments and are relatively easier to value.
- Large-Cap and Multi-Cap Equity Funds: These funds may be more widely accepted because they usually have broader portfolios than concentrated equity schemes.
Mutual Funds that Are Generally Not Eligible for LAMF
- ELSS Funds: ELSS funds cannot be pledged during the mandatory 3-year lock-in period. After the lock-in ends, eligibility depends on the lender.
- Close-Ended Schemes: These schemes are usually not accepted because they cannot be redeemed before maturity.
- Sector-Specific and Thematic Funds: These funds may be excluded due to higher concentration risk.
- Funds from Non-Approved AMCs: Mutual funds from AMCs outside the lender’s approved list may not qualify.
- Units Already Pledged Elsewhere: Units already pledged for another loan cannot usually be pledged again.
Interest Rates and Charges on Loan Against Mutual Funds
LAMF interest rates are generally lower than personal loans or credit cards because the loan is secured by collateral. However, rates vary across lenders and depend on factors such as the type of fund pledged, the borrower’s credit profile, and market conditions.
Many lenders base their rates on the MCLR (Marginal Cost of Funds-Based Lending Rate) plus a spread, which means rates can change over time.
| Charge Type | General Range | smallcase |
|---|---|---|
| Interest rate | Typically 10-14% p.a. (indicative; varies by lender) | Starting at 9.99% p.a. on outstanding principal only |
| Interest calculation | Most LAMF products: on drawn amount only (OD structure) | On outstanding principal only, not on the full credit limit |
| Processing fee | 0% to approximately 4% of the loan amount (varies by lender) | Rs 999 or 1% of the loan amount (max Rs 4,999) + GST |
| Late payment interest | Varies by lender | 1.5% per month on overdue interest |
| Bounce charges | Varies by lender | Rs 1,200 per bounce |
| Demat pledge charges | Varies by lender | Rs 50 + GST (lender) + Rs 32 + GST (Zerodha) per security |
| Foreclosure/prepayment | Many lenders: nil on OD structure | Nil |
| Lien removal (post-loan) | Varies by lender | Nil |
| Lien removal (pre-disbursal cancellation) | Varies by lender | Actual processing fee applicable |
Loan Structure for LAMF: Overdraft Facility vs Term Loan
Most lenders offer LAMF as an overdraft (OD) facility rather than a conventional term loan. Understanding the difference is important before applying.
| Feature | Overdraft Facility | Term Loan |
|---|---|---|
| Interest charged on | Amount withdrawn and for the period used only | Full disbursed amount from the disbursement date |
| Withdrawal | Withdraw as needed within the sanctioned limit | One-time disbursal |
| Repayment | Flexible; repay and re-use within tenure | Fixed EMI schedule |
| Common structure | More common for LAMF | Less common; available with some lenders |
Under the overdraft structure, the lender sanctions a credit limit based on the value of pledged funds. You can draw from this limit as and when needed, and interest accrues only on the outstanding drawn amount for the duration it is used.
What Continues While the LAMF Is Active?
The following aspects of your mutual fund investment continue normally even after pledging:
- Capital appreciation: Pledged units remain invested in the market. Any increase in NAV benefits you, as you retain ownership.
- Dividends: Dividend payouts (under IDCW plans) continue to be credited to your registered bank account.
- SIP contributions: Ongoing Systematic Investment Plans in the same or different folios are not affected by the pledge on existing units.
Restrictions Apply to Pledged Units:
- You cannot redeem, sell, or switch the pledged units until the loan is fully repaid and the lien is removed.
- On smallcase, partial unpledging is not possible. All pledged units are released only upon full loan closure.
- If your SIP generates new units in the same folio, those new units are generally not part of the original pledge unless the lender specifically requires additional lien marking.
Risks to Know Before Applying for a Loan Against Mutual Funds
Market-Linked NAV Fluctuation
The loan amount is tied to the Net Asset Value (NAV) of your pledged funds. If market conditions cause the NAV to fall, the value of your collateral decreases. This directly reduces your eligible borrowing limit.
Margin Calls and Shortfall Obligations
If the NAV of pledged funds drops below the level required to maintain the agreed LTV ratio, the lender may issue a margin call. In this situation, the lender may require you to:
- Pledge additional mutual fund units to restore the LTV ratio, or
- Partially repay the outstanding loan amount to reduce it to within the eligible limit.
Failure to respond to a margin call within the stipulated timeframe may result in the lender selling a portion of your pledged units without further notice.
Lien Restrictions on Redemption and Switching
Once units are pledged, you cannot redeem, sell, or switch them until the lien is fully released. If you have pledged a significant portion of your portfolio, this limits your ability to respond to market conditions or personal liquidity needs through those specific units.
LTV Breach: What Happens if Fund Values Fall
If the market value of your pledged funds falls and your outstanding loan exceeds the allowed LTV, the lender will notify you of the shortfall.
On smallcase, the process is as follows:
- You have 7 days from the notification to repay the excess amount and bring the outstanding loan back within the LTV limit.
- If the shortfall is not resolved within 7 days, Bajaj Finance may liquidate a portion of the pledged mutual fund units to recover the excess amount.
- If the full outstanding amount is not repaid by the end of the 3-year tenure, pledged funds may also be liquidated at that point.
Example: If you pledged equity MFs worth Rs 1,00,000 and borrowed Rs 45,000 (45% LTV), and the fund value drops to Rs 90,000, your eligible limit becomes Rs 40,500. You would need to repay Rs 4,500 to stay within the allowed LTV.
Consequences of Default
If you default on repayment, the lender holds the legal right to sell the pledged mutual fund units to recover the outstanding loan amount. This forced liquidation may occur at an unfavourable NAV, potentially resulting in a financial loss.
Tax Implications on LAMF
Pledging mutual fund units as collateral is not a sale. As a result:
- No capital gains tax is triggered at the time of pledging, unlike a redemption.
- Your investment holding period continues uninterrupted during the loan tenure.
- If the lender is forced to liquidate pledged units due to a default, that liquidation is treated as a redemption and capital gains tax will apply based on the fund type and holding period.
- Interest paid on a LAMF is generally not tax-deductible for personal expenses. If the loan is used for business purposes, tax treatment may differ. Consult a qualified tax adviser for guidance specific to your situation.
LAMF vs Personal Loan vs Credit Card
| Parameter | LAMF | Personal Loan | Credit Card |
|---|---|---|---|
| Collateral required | Yes (mutual fund units) | No | No |
| Typical interest rate | From 9.99% p.a. (smallcase); varies by lender | 11-24% p.a. (indicative) | 30-45% p.a. (indicative) |
| Interest charged on | Drawn amount only (OD structure) | Full disbursed amount | Outstanding balance |
| Loan tenure (smallcase) | 36 months | 12-60 months typically | Revolving |
| Processing time | Often same day (digital) | 2-7 days typically | Immediate (pre-approved) |
| Credit score check | No hard CIBIL check (smallcase) | Yes | Yes |
| Capital gains tax on funds | Not applicable (no sale) | Not applicable | Not applicable |
| Impact on investments | Units pledged; cannot redeem until repaid | No impact | No impact |
| Risk of forced sale | Yes, on LTV breach or default | No | No |
Note: Interest rates are indicative ranges based on publicly available information as of early 2026 and may vary significantly by lender, profile, and product. This table is for illustrative purposes only and is not a recommendation of any product.
Documents Required to Apply for a Loan Against Mutual Funds
LAMF applications are largely digital and require minimal documentation. The following are required documents to apply for LAMF:
- PAN card (mandatory for KYC)
- Aadhaar card or other valid identity proof
- Bank account details (account linked to mutual fund folio)
- Mobile number and email address registered with your mutual fund folios
- Folio number or consent to fetch holdings via CAMS or KFintech using your registered PAN, phone, or email
On smallcase, the process is fully paperless. If you have multiple email IDs or phone numbers linked across different folios, entering all of them at the holdings import step helps ensure an accurate credit limit calculation.
How to Apply for a Loan Against Mutual Funds?
The application process on smallcase is fully digital. The general flow is as follows:
- Log in to smallcase Credit: Visit smallcase Credit and click on Against Mutual Funds
- Import MF Holdings: Connect holdings using your PAN, registered email ID, or phone number.
- Select Funds to Pledge: Choose eligible funds as collateral and view your credit limit.
- Link Bank Account & E-Mandate: Add bank details and set up auto-debit for monthly interest.
- Pledge Mutual Funds: Selected units are lien-marked in favour of Bajaj Finance.
- Sign the Loan Agreement: Review and sign digitally using OTP verification.
- Disbursement: The loan amount is credited within 2 working hours.
You can pause mid-application and resume from where you left off. The process is paperless and requires no physical documents.
To Wrap It Up…
A Loan against MF (LAMF) offers a unique combination of flexibility, lower loan against mutual funds interest rates, and the continued opportunity to earn returns on your investment. As with all financial decisions, assessing your financial situation, understanding the risk of a loan against mutual funds, and consulting with a financial advisor are essential. You can now avail loans against mutual funds without disrupting your long-term investment strategy via 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 Things to Consider Before Applying for LAMF
A loan against mutual funds allows investors to borrow money by using their mutual fund investments as collateral. It provides a way to access funds without selling the mutual fund units, enabling investors to meet their financial needs while still retaining ownership of their investments.
Opting for a loan against mutual funds online can be a suitable choice for investors seeking immediate liquidity without liquidating their mutual fund holdings. However, it is essential to carefully evaluate the terms and conditions of the loan, including interest rate on loan against mutual funds, repayment terms, and associated costs.
The loan amount depends on the value of the mutual funds you will keep as collateral. You can get a loan against mutual funds or LAMF from ₹25,000 to ₹5,00,00,000 via smallcase.
Yes. Dividends or IDCW payouts continue to be credited to your registered bank account even during the loan period, as you retain ownership of the pledged units.
A drop in NAV reduces the effective collateral value. If the loan amount exceeds the revised eligible limit (based on the new NAV and LTV ratio), the lender may issue a margin call. You may be required to pledge additional units or repay part of the loan to restore the required ratio.
No. Pledging units is not a sale or redemption, so no capital gains tax is triggered at the time of pledging. If the lender liquidates your units due to a default, that liquidation is treated as a redemption and capital gains tax will apply based on the fund type and holding period. Consult a tax adviser for specific guidance.
On smallcase, the facility is currently available to resident Indians only. Some other lenders may accept NRI applications, though eligibility criteria and permissible fund types typically differ. NRI borrowers should check directly with the relevant lender.
On smallcase, there are no foreclosure or prepayment charges. You can repay the principal at any time and close the loan without additional fees. If applying with other lenders, confirm prepayment terms before signing the agreement.
On smallcase, joint account holders are not eligible for LAMF. Some other lenders may allow joint holding pledges, typically requiring all holders to be co-applicants. Check with the specific lender.
Funds such as ELSS (during lock-in), closed-ended schemes, highly sector-specific or thematic funds, and funds not listed on the lender’s approved list. Always verify before applying.
ELSS units cannot be pledged during the mandatory 3-year lock-in period, as they cannot be redeemed or transferred during this time. Once the lock-in period ends, some lenders may accept the units as collateral, depending on their internal policies. Confirm with the lender directly.
Pledging existing units does not affect ongoing SIP contributions. New units generated through SIPs in the same or different folios continue to accumulate normally. However, only the specifically pledged units are subject to the lien.
