Loan Against Mutual Funds: Borrow Without Selling Units

QUICK ANSWER: A loan against mutual funds (LAMF) lets you pledge fund units as collateral and borrow against their value without redeeming them. Under RBI ceilings effective 1 July 2026, banks may lend up to 75% of equity value and 85% of debt value. Interest applies only to the amount drawn, but a market fall can trigger a margin call. You need money for a few months — a medical bill, a home repair, a fee deadline. Selling mutual fund units to raise it breaks a long-term plan and can attract exit loads and capital-gains tax. The third option is to pledge the units and borrow against them.

What is a loan against mutual funds, and how does it work?

LAMF is a secured credit facility. You offer mutual fund units as collateral. The lender marks a lien on those units — a formal hold recorded with the registrar (CAMS or KFintech) or the depository — and gives you a credit limit based on their current value. You remain the unit holder, but pledged units cannot be redeemed, switched or transferred until the lien is released. Most LAMF facilities are overdrafts, not lump-sum loans: a limit is sanctioned, you draw only what you need, and interest is charged on the drawn amount. A personal loan is the opposite — the full amount is disbursed upfront and interest runs on it from the first EMI. Not every fund can be pledged: lenders work from an approved list, and common exclusions are units already pledged elsewhere and Equity Linked Savings Scheme (ELSS) units still inside their three-year lock-in.

The RBI rules that changed in 2026: ceilings, not offers

This is the distinction most online explainers blur. The RBI sets maximum ceilings; individual lenders then set their own, often lower, limits. Under the RBI's Commercial Banks – Credit Facilities Amendment Directions (February 2026, effective 1 July 2026), bank ceilings are: 60% loan-to-value (LTV) on listed shares and convertible debt, 75% on equity mutual funds, ETFs, REITs and InvITs, and 85% on debt mutual funds. The per-borrower cap rose from ₹20 lakh to ₹1 crore, at banking-system level. Why does the gap matter? "Borrow up to 75% of your equity funds" is the RBI maximum, not a promise: some lenders offer around 45% to 50% on equity funds. Compare the lender's own LTV, not the ceiling. Rate context: the RBI raised the repo rate to 5.50% in October 2026; minutes released on 21 October showed a unanimous hike vote and a 4–2 split on the shift to calibrated tightening.

How much can you borrow? Worked LTV examples

The loan-to-value ratio is the loan as a percentage of the pledged portfolio's current value. Take a ₹10 lakh portfolio: - Equity funds worth ₹10 lakh: ceiling 75% = ₹7,50,000; at a lender's 50% = ₹5,00,000; at 45% = ₹4,50,000. - Debt funds worth ₹10 lakh: ceiling 85% = ₹8,50,000. - Mixed portfolios are calculated fund by fund. Borrowing the full maximum leaves no cushion against the margin-call risk below; a smaller draw is structurally safer, whatever the rate.

What does it cost? Interest, fees, and the drawn-only difference

LAMF rates are generally lower than personal loan rates because the loan is secured by liquid assets the lender can sell on default. Indicative 2026 ranges put LAMF starting at around 9.9% per annum, typically about 9% to 12% per annum, against personal loans typically at about 10.5% to 24% per annum depending on profile. These are indicative ranges, not quotes. Fees vary too: examples include around 0.5% to 1% of the credit limit, or ₹999 or 1% of the loan subject to a cap, plus GST, plus possible renewal or penal charges. Ask for the full schedule of charges in writing, and check prepayment charges — many LAMF facilities report nil prepayment charges, but that is a lender feature, not a guarantee. Worked comparison, using a regular EMI-style calculation on ₹5 lakh over three years:

- Personal loan at 14% per annum: EMI ₹17,089 per month. Total interest ₹1,15,197. Total paid ₹6,15,197. - Loan against mutual funds at 10.5% per annum: EMI ₹16,251 per month. Total interest ₹85,044. Total paid ₹5,85,044. - Difference: ₹30,153 less interest on the LAMF calculation. Maths: EMI = P × r × (1 + r)^n ÷ ((1 + r)^n − 1), with P = ₹5,00,000, r = monthly rate, n = 36 months (r = 0.011667 at 14%, 0.00875 at 10.5%). The more realistic LAMF comparison is the overdraft one: draw ₹5 lakh for six months at 10.5% per annum, interest-only, and interest = ₹5,00,000 × 10.5% × 6 ÷ 12 = ₹26,250 (₹25,000 at 10%). Long-running overdrafts can still cost more than a fixed EMI.

Loan against mutual funds vs personal loan: the honest comparison

- Collateral: LAMF is secured against lien-marked units. A personal loan is unsecured, with no collateral. - Typical 2026 rate range: LAMF from around 9.9% per annum, typically about 9% to 12% per annum. Personal loan typically about 10.5% to 24% per annum. - Credit score role: LAMF approval depends mainly on the portfolio, suiting self-employed borrowers or thinner credit histories, though lenders still run checks. A personal loan depends heavily on credit score and income proof. - Repayment: LAMF is flexible — draw, repay and redraw within the tenure. A personal loan has fixed EMIs over a fixed tenure, typically one to five years. - Risk: LAMF carries margin-call and forced-sale risk if values fall. A personal loan carries no such investment risk, but default still affects credit history. LAMF is not always cheaper: a prime borrower at 10.5% on a personal loan is roughly at par. The advantage is largest against a typical personal loan rate, for short durations.

The risk nobody should skip: margin calls and forced sales

If the market falls, the lender recalculates your eligible limit. If your loan exceeds the permitted LTV, you face a margin call: repay part of it, pledge more eligible units, or both, within the lender's window. One lender's published process gives seven days to cure a breach, after which it may sell pledged units. Windows vary; the principle does not. Example at a lender LTV of 50%: pledge funds worth ₹10 lakh, borrow ₹5 lakh. The portfolio falls 20% to ₹8 lakh, so your loan is ₹5,00,000 ÷ ₹8,00,000 = 62.5% of value. At the 50% limit, the permitted loan is ₹4,00,000 — a ₹1,00,000 shortfall. The loan is still inside the RBI's 75% ceiling (₹6,00,000 on ₹8 lakh): the binding constraint is the lender's lower limit. At ₹6,50,000, the loan would be 76.9% — above even the RBI ceiling (permitted ₹4,87,500). The practical message: borrow well below the maximum, keep a repayment source independent of the market, and treat a LAMF for a long, uncertain period as riskier than one for a short, defined gap.

When pledging beats selling, and when it does not

Pledging tends to make sense as a short-term bridge — a medical expense, a fee deadline, a business cash-flow gap — where the alternative is redeeming long-held units with large gains. It tends not to make sense when the need is long-term or repayment is unclear; when borrowing is close to the maximum LTV on volatile equity funds; for speculative market investments, which RBI rules restrict; or when the units would need redeeming soon anyway — in that case an orderly redemption, with tax and exit-load costs known upfront, may be cleaner.

How to apply, step by step, and how to close it

Check eligibility (resident Indian, typically 18 and above, holding eligible units above the lender's minimum), select schemes from the approved list, and authorise the lien, usually with an OTP, through the registrar or depository. The lender sanctions a limit per fund category and you draw as needed; disbursement takes hours at some lenders, days at others. Closing matters as much as opening: repay principal plus accrued interest, raise a closure request, and confirm the lender has submitted a lien-release request — only then are units fully accessible again. Check the folio statement after closure for any lien left marked by error. Before applying, compare three things across lenders: the LTV for your fund categories (not the RBI ceiling), the full schedule of charges, and the margin-call process.

Sources: RBI Commercial Banks – Credit Facilities Amendment Directions, February 2026, effective 1 July 2026; Smallcase and Volt Money LAMF guides 2026; Mirae Asset Financial Services LAMF vs personal loan comparison 2026; RBI October 2026 MPC minutes released 21 October 2026. This article is for educational purposes only and is not financial advice. Please consult a SEBI-registered investment adviser for personalized guidance. Investments are subject to market risk.