Money needs can strike anytime. While most people think of personal loans first, smarter alternatives like Loan Against Mutual Funds (LAMF) can help you access funds without liquidating your investments. Mutual funds are typically viewed as long-term investment tools, but they can also be used to secure short-term loans. A Loan Against Mutual Funds (LAMF) allows you to borrow money without having to sell your investments. With the rise of digital platforms, accessing LAMF has become easier and more convenient for those in need of quick liquidity while still staying on track with their long-term financial plans. However, like any loan, it carries certain risks. Think of it like pledging gold—you still own the asset, but the lender places a hold on it, meaning you can’t redeem or switch those mutual fund units until the loan is fully repaid.
– How Much Can You Borrow with LAMF?
You can borrow up to 50% of the value of your equity mutual funds.
For debt or liquid funds, the loan amount can go up to 75–90% of the fund value.
ELSS (Equity Linked Savings Scheme) units that are still within the three-year lock-in period are not eligible to be pledged for a loan.
When it comes to hybrid funds, treatment varies by lender. Some consider them as equity funds regardless of their actual equity allocation, while others classify debt-heavy hybrid funds as debt. It’s important to clarify how your specific hybrid fund will be treated before applying for the loan.
– Why Not Just Opt for a Personal Loan?
Personal loans typically come with higher interest rates ranging from 12% to 24% and require you to pay fixed EMIs. In contrast, a Loan Against Mutual Funds (LAMF) is a secured loan, meaning it’s less risky for the lender. That’s why the interest rates are usually lower, generally around 9% to 11%, and occasionally up to 15%.
Another advantage is flexibility. Most LAMFs work like an overdraft facility you only pay interest on the amount you actually use, not the entire sanctioned limit. While some lenders do offer term loans for 12 to 36 months, these are less common.
The takeaway? If you hold mutual funds and need short-term liquidity, LAMF can be a more cost-effective and flexible alternative to a personal loan.
– What Happens If the Market Drops?
Imagine you’ve taken a loan of ₹5 lakh against a mutual fund portfolio worth ₹10 lakh. If the market corrects by 20%, your portfolio’s value falls to ₹8 lakh. Now, your loan exceeds the permitted 50% limit.
In this case, your lender might ask you to either provide additional collateral or repay part of the loan. If you’re unable to do so, they could liquidate your pledged units and at the lower NAV, that could lead to losses or unexpected tax liabilities.
To minimize this risk, it’s better to pledge low-volatility funds, such as debt or liquid mutual funds, especially if you’re using LAMF as a backup during emergencies.
– LAMF Isn’t a One-Size-Fits-All Solution
A Loan Against Mutual Funds (LAMF) is best suited for short-term financial needs such as medical expenses, tuition fees, or temporary cash flow issues like salary delays. It provides quick liquidity without interrupting your SIPs or triggering capital gains taxes from redeeming your investments.
However, it’s not ideal for large or ongoing financial commitments—like a home loan down payment or long-term education fees. Using LAMF repeatedly for such goals can gradually erode your long-term wealth. Unless your mutual fund consistently outperforms the interest you’re paying on the loan, you may end up losing more in returns than you gain in liquidity.
In short, use LAMF wisely—it’s a helpful tool in emergencies, but not meant for casual or repeated borrowing.
Illustration:
| CATEGORY | METRIC | SELLING MUTUAL FUND | PERSONAL LOAN | LAMF |
| Assumptions | MF Holding | Rs.10,00,000 | Rs.10,00,000 | Rs.10,00,000 |
| MF Annual Return | 12% | 12% | 12% | |
| Loan Amount Needed | Rs. 7,00,000 | Rs. 7,00,000 | Rs. 7,00,000 | |
| Loan Interest Rate | – | 18% p.a | 11% p.a | |
| Loan Tenure | – | 1 Year | 1 Year | |
| Investment Horizon | 5 Years | 5 Years | 5 Years | |
| Cash Flow (Year 0) | Cash Received | Rs.7,00,000 | Rs.7,00,000 | Rs.7,00,000 |
| Interest Payable | Rs.0 | Rs.64,176 | Rs.61,867 | |
| Loan Repayment | Rs.0 | Rs.7,64,176 (after 1 Y) | Rs.7,61,867 (after 1Y) | |
| Investment Value (5 Years) | Amount Remaining in MF | Rs.3,00,000 | Rs.10,00,000 | Rs.10,00,000 |
| Grows to (12% CAGR for 5 years) | Rs.5,28,190 | Rs.17,62,341 | Rs.17,62,341 | |
| Final Postion (5 Years) | Total Future Value | Rs.5,28,190 | Rs.17,62,341 | Rs.17,62,341 |
| Less:loan repayment | Rs.0 | Rs.7,64,176 (after 1 Y) | Rs.7,61,867 (after 1Y) | |
| Net Wealth after 5 years | Rs.5,28,190 | Rs.9,98,165 | Rs.10,00,474 |
– How to Confirm If Your Mutual Funds Are Released?
After you’ve repaid your loan, the lien on your mutual fund units should be lifted. Some platforms remove the lien automatically, while others may require you to submit a request manually.
To verify, simply check your Consolidated Account Statement (CAS) from CAMS or KFintech. If there’s no lien mentioned, your units are free and fully accessible again.
Conclusion:
When used responsibly, a Loan Against Mutual Funds (LAMF) can be a smart solution for short-term financial needs. It offers liquidity without disturbing your long-term investments.
However, if misused as a quick fix for cash or seen as a substitute for proper financial planning, it can erode your returns, disrupt the power of compounding, and lead to a cycle of ongoing interest payments.
To understand more on the topic as well as to start investments please feel free to contact us:
Phone: +91-9324609115
E-mail: team@richvikwealth.in
The article is authored by Ms. Ritika Sharma from Team RichVik.