How to get a loan against your mutual fund investments

Mutual fund investments help you build wealth over time. However, did you know you can also use them to secure a loan? Lenders take your investment as a guarantee to give you loans on competitive rates. The value of your investment is assessed by lenders before disbursing the loan.

Many banks and financial institutions offer loans against mutual funds. This option allows you to access funds without selling your investments. It’s a smart way to meet urgent financial needs while keeping your long-term investment goals intact. Let’s understand what a loan against mutual funds is and when you can apply for the same!

What Is a Loan Against Mutual Funds?

A loan against mutual funds (LAMF) is a type of secured loan. Here, your mutual fund units act as collateral. The lender provides funds based on the value of your mutual fund holdings. You can continue to earn returns on your investments even after pledging them.

Banks and NBFCs typically offer loans against both equity and debt mutual funds. However, the terms and loan-to-value (LTV) ratio may vary depending on the type of mutual fund.

Also Read: Senior Citizen Fixed Deposits offering highest interest rates in March 2025

How Does It Work?

A loan against mutual funds works by pledging your mutual fund units as collateral to secure a loan from a bank or NBFC.

Adhil Shetty, CEO of Bankbazaar.com, says, “First, you need to apply for the loan with a lender that offers this facility. After submitting the required documents, the lender creates a lien (legal claim) on your mutual fund units, which means you cannot sell or redeem them until the loan is repaid. The loan amount sanctioned depends on the type and value of the mutual fund units.”

Lenders usually offer up to 50% of the value for equity mutual funds and up to 70%–80% for debt mutual funds. Once approved, the loan amount is directly credited to your bank account. You can repay the loan in EMIs or as a lump sum, depending on the terms set by the lender. Until the loan is fully repaid, the mutual fund units remain under the lender’s control. After repayment, the lien is removed, and you regain full ownership and control over your mutual fund holdings.

Eligibility and Documents Required

To get a loan against mutual funds, you must meet the following requirements:

1. You should be an Indian resident.
2. You must hold mutual funds in dematerialised (Demat) form.
3. You should have a regular source of income to ensure repayment capacity.
4. Jointly-held mutual funds can also be pledged if all holders give their consent.

You will need to submit the following documents:

1. KYC documents (PAN card, Aadhaar card, passport, voter ID)
2. Proof of income (salary slips, bank statements, ITR)
3. Mutual fund statement from the registrar
4. Loan application form

Loan Amount and LTV Ratio

The loan amount depends on the type and value of your mutual fund units:

1. Equity Mutual Funds – Lenders usually offer up to 50% of the current value.
2. Debt Mutual Funds – Lenders may offer up to 70% to 80% of the current value.

For example, if your equity mutual fund units are valued at Rs 10 lakh, you can get a loan of up to Rs 5 lakh. If they are debt funds, you could get up to Rs 7–8 lakh.

Interest Rates

Interest rates for loans against mutual funds are usually lower than personal loans. Rates range from 8% to 12% per annum, depending on the lender and the type of mutual fund. Debt mutual funds attract lower rates than equity funds due to lower risk.

Risks and Limitations

Market Risk – If the value of your mutual fund units falls sharply, the lender may ask for additional collateral or partial repayment.

Interest Burden – Failure to repay the loan on time will lead to interest accumulation and penalties.

How to Apply Online

You can apply for a loan against mutual funds online through the lender’s website or mobile app:

1. Log in to your net banking or mobile app.
2. Select the “Loan Against Securities” or “Loan Against Mutual Funds” option.
3. Provide details of your mutual fund holdings.
4. Upload necessary documents.
5. Accept the terms and conditions and submit the request.
6. Approval is usually granted within 24 hours. The loan amount is directly credited to your bank account.

A loan against mutual funds offers quick access to funds at a lower cost. However, it’s important to handle repayments carefully to avoid any financial strain. Also remember to check the terms and risks before pledging your mutual fund units for getting a loan.