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Interest Rates of Loans Against Mutual Funds: A Guide

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Created on
September 4, 2023


What’s Inside

Have you faced a financial emergency and had no choice but to sell off your investments to meet the unexpected costs? Most people go through this challenging scenario at some point.

However, did you know that if you have mutual funds investments, you can pledge them as collateral to borrow funds from a bank or NBFC? Before you do this, you need to understand how the interest rates of loans against mutual funds work.

How do LAMF Interest Rates Work?

  • Borrowing money from a bank or NBFC using your mutual fund investments as collateral is called a loan against mutual funds or LAMF.
  • The interest rate on such loans is usually lower than unsecured loans like personal loans or credit cards.
  • This is because these are secured loans backed by collateral, reducing the lender's risks. Borrowers benefit from this by getting lower interest rates.

Factors Affecting the Interest Rates of Loans Against Mutual Funds

A wide range of parameters decides the interest rate on a loan against MF investments. Here is a closer look at some key factors that drive the interest rates on such loans.

  • The Lender’s Policy

The bank or NBFC may have its own terms and conditions for calculating the interest rates applicable on loans availed against mutual funds. This depends on the lender’s internal policies, and borrowers have no control over it.

  • The Type of Mutual Fund

The type of mutual fund may also influence the loan's interest rates. Loans against debt funds, which are less volatile, may be more affordable than loans against market-linked equity mutual funds.

  • The Repo Rate

The repo rate is the interest rate at which the central bank lends funds to commercial banks. If the repo rate increases, the cost of borrowing also rises for all kinds of credit facilities. Thus, the interest rate on such loans against mutual funds increases if the repo rate increases.

  • The MCLR

The Marginal Cost of Funds Lending Rate (MCLR) is the lowest rate of interest that a bank can levy on its loans. It depends on the prevailing repo rate. Banks add a spread over the MCLR and charge interest on loans against MFs.

  • The Loan Particulars

Aside from the factors outlined above, the particulars of the loan itself may influence the interest rates. These factors include aspects like the chosen repayment tenure and the loan amount.

Summing Up

The bottom line is that the interest rates of loans against mutual funds are generally lower than those of many other credit facilities. That said, you will still have to repay the principal and the interest completely to release the lien on your mutual funds. For this reason, ensure that you only avail of the LAMF facility if there is a non-negotiable financial emergency.

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Frequently Asked Questions

1. Is it advisable to take a loan against mutual funds?

It may be a good idea to take a loan against an MF if you want to meet your emergency financial needs without liquidating your investments or suffering the burden of high-interest rates.

2. What is the interest rate for a loan against mutual funds?

The exact interest rates of loans against mutual funds vary from one lender to another. However, the interest rates are typically nominal since these are secured borrowings.

3. How does a loan against MF work?

You pledge your existing mutual fund investments with a lender and borrow funds against this collateral. You cannot redeem your mutual funds until you repay the loan and the interest charged.

4. How does the interest rate work with mutual funds?

Mutual funds only offer returns; they do not offer any interest. The returns on debt mutual funds depend on the interest rates of the underlying debt securities, while the returns from equity funds are market-linked.

5. What happens to the cost of a loan against mutual funds when interest rates rise?

The rise in the prevailing interest rates can make all borrowing costlier. So, before you avail of the LAMF facility, check the interest rates of loans against mutual funds and the market rates.


Fi Money is not a bank; it offers banking services through licensed partners and investment services through epiFi Wealth Pvt. Ltd. and its partners. This post is for information only and is not professional financial advice.
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