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Basics of Loans Against Mutual Funds (LAMF): A Comprehensive Guide

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September 4, 2023


What’s Inside

You may be familiar with secured loans where assets like gold, land or even a house property can be offered as collateral. But have you heard of a loan against mutual funds (LAMF)? It is exactly what it sounds like — you pledge your mutual fund investments as collateral and borrow funds from the lending bank or financial institution in return.

Like all secured loans, obtaining loans on mutual funds is easy if you have sufficient collateral. However, before you avail of the LAMF facility, you must know how it works and its key features. Let’s explore this in detail.

How Does a Loan Against Mutual Funds Work?

  • Some banks accept mutual funds as collateral for loans. If you have invested in mutual funds, you can pledge this asset and borrow funds against it. Since this is a secured loan, the interest rate will typically be lower than the cost of borrowing via personal loans or credit cards.
  • You cannot redeem your mutual fund investments until you repay the loan. However, during the repayment tenure of the loan against the MF, you will still continue to earn returns and/or dividends from the mutual fund scheme.

For example, say you have invested in ELSS mutual funds and have an urgent need for funds because of a family medical emergency. In that case, you can avail of a loan against the ELSS mutual funds and settle the medical bill. You can repay the loan per the bank’s terms, after which you can redeem your investment if you wish to.

Key Features of a Loan Against Mutual Funds

A loan against mutual funds has many distinct features. While the exact terms of the loan may vary from one lender to another, the features outlined below generally pertain to this credit facility.

  • Near-Instant Processing and Disbursal

Since this is a secured loan, your application will be processed almost instantly after the lien on the asset is granted. The funds are also disbursed to your bank account promptly without any delay.

  • Loan Limit as a Percentage of Asset Value

The lending bank or NBFC sets the minimum and the maximum amount of loan you can avail of. The maximum amount you can borrow is typically a percentage of the mutual fund's net asset value (NAV).

  • Affordable Interest Rates

The interest rate on a loan against mutual funds is generally affordable when compared with the interest rates on personal loans and other unsecured borrowings. This is because the asset pledged in a LAMF reduces the lender’s risk.

  • Eligibility for Select Schemes Only

Not all mutual fund schemes are eligible to be pledged as collateral. Only specific schemes as selected by the lending financial institution can be offered as security. Check the list of eligible schemes before you apply for a loan against mutual funds.

  • Lien on Asset During Repayment Period

You cannot liquidate your mutual fund investments during the repayment period. The lien on these assets will remain in force until you have repaid the borrowed amount and the interest thereon.

Summing Up

The bottom line is that you can pledge your mutual fund investments to borrow funds and meet your financial requirements. However, it’s crucial to repay the loan entirely so you can redeem your mutual funds and capitalise on the profits. To use the loan against the MF facility smartly, it’s best to only avail of it if you need funds urgently. Pledging your mutual funds to borrow money for discretionary expenses is never a good idea.

Instant Loans: An Easy Alternative to LAMF

Don’t have mutual fund investments yet? Instant pre-approved loans may be a suitable alternative to a loan against Mutual Funds. Fi Money provides instant loans that arrive directly in your savings account. These are pre-approved personal loans made available to select users with good credit scores. On Fi, this process is 100% paperless, and the loans are provided at competitive interest rates — where each user remains in control with complete visibility of all details.

Frequently Asked Questions

1. How does a loan against mutual funds work?

In a loan against mutual funds, you pledge your investment as collateral to borrow funds. You must then repay the loan. During the repayment period, you cannot sell your investments.

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

If you need funds urgently to meet a financial emergency, a loan on mutual funds may be a good choice because it helps you tackle this requirement without redeeming your investments.

3. How much loan can be taken against mutual funds?

The maximum amount of loan that can be obtained against mutual fund investments depends on the MF scheme and the lender’s terms and conditions.

4. On what basis does a mutual fund house provide a loan to its members?

A loan against mutual funds is provided by banks and NBFCs and not by the mutual fund house itself. The fund house only offers a lien on your investments to the lending bank.

5. Is mutual fund withdrawal taxable?

Yes, mutual fund withdrawals are taxable. Short-term capital gains from equity funds are taxed at 15% (if they exceed Rs. 1 lakh), while non-equity funds are taxed at the slab rate applicable. Long-term capital gains from equity funds are taxed 10% without indexation, while those from non-equity funds are taxed 20% with indexation.


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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