Loan Against Mutual Funds: Borrow Without Redeeming Your Units

Selling mutual fund units to meet a short-term need can interrupt compounding, trigger exit loads and create a capital-gains tax bill. A loan against mutual funds (LAMF) lets you raise money while your units stay invested.

How it works

You pledge eligible units to a bank or NBFC. The pledge is recorded as a lien with the registrar — CAMS or KFintech — usually through an online OTP-based process. The units remain in your name, keep earning returns and continue to receive any dividends, but cannot be redeemed or switched until the lien is released.

Most lenders offer LAMF as an overdraft limit: you draw only what you need and pay interest only on the amount used, for the days it is used.

How much can you borrow?

The limit depends on the scheme type and the lender's policy. Typical market practice:

Each lender keeps an approved scheme list, and the available limit changes daily with NAV.

Costs to check

Risks to understand

• Margin calls: if markets fall and the value of pledged units drops, the lender may ask you to repay part of the loan or pledge more units. If you do not, it can redeem units without waiting for markets to recover.
• Locked flexibility: pledged units cannot be switched or redeemed freely.
• Leverage: using the loan to invest more in markets magnifies losses as well as gains.

When LAMF makes sense

• A short-term need — a medical bill, a business payment, a gap before a property sale — that you can repay within months
• When redeeming would trigger exit loads or short-term capital gains
• When you prefer a secured, lower-cost alternative to a personal loan or credit card debt

It is usually a poor fit for long-term borrowing or for funding speculative trades.

Before you apply

1. Check that your folios are in your individual name, with PAN and mobile/email registered.
2. Confirm which of your schemes are on the lender's approved list.
3. Borrow less than the full limit, so that a market dip doesn't immediately trigger a margin call.
4. Read the sanction letter for interest, fees and the margin shortfall process.

SERNET can help you compare lender options and complete the pledge for your existing mutual fund holdings. The loan itself is sanctioned by the lender, under its own terms and approval.