Six Things to Know About Loans Against Mutual Funds

Life is full of surprises, and sometimes, unexpected expenses can create a financial crunch. It could be a home renovation, a wedding in the family, or even a medical emergency. In such times, many people dip into their savings or liquidate their investments. But selling investments in a hurry often leads to losses and disrupts long-term financial planning.

A better alternative is to take a loan against your mutual fund holdings. Just like you can pledge gold or property, mutual fund units can also be pledged to raise funds. Banks and Non-Banking Financial Companies (NBFCs) offer this facility, making it possible to meet urgent financial needs without disturbing your investment journey.

Here are six key things you must know about loans against mutual funds.

1. Loan Amount Depends on Your Mutual Fund Holdings

• The loan you can avail of depends on the type of mutual fund and the lender’s policies.
• For equity mutual funds, lenders generally allow loans of up to 50–60% of the Net Asset Value (NAV).
• For debt mutual funds, the limit is higher, often ranging between 70–85%.
• This percentage may vary depending on the bank or NBFC, but the key point is that equity funds carry more risk, so the loan-to-value ratio is lower compared to debt funds.

2. Not Every Mutual Fund Qualifies for a Loan

• Lenders do not accept all mutual funds as collateral. Each bank or NBFC has its own approved list of schemes.
• For instance, some banks only allow loans against schemes managed by certain Asset Management Companies (AMCs). This means you need to check whether your mutual fund scheme qualifies before applying.

3. There is an Upper and Lower Loan Limit

• Like other loan products, loans against mutual funds also come with minimum and maximum limits.
• For banks, the minimum amount typically starts from around ₹50,000, and the maximum can go up to ₹20–50 lakh for equity funds and up to ₹1 crore for debt funds.
• NBFCs, on the other hand, may offer much larger limits, with loans ranging from ₹25 lakh to as high as ₹10 crore.
• The exact amount depends on the lender’s policy and the value of your pledged holdings.

4. Interest Rates Are Lower Than Personal Loans

• One of the biggest advantages of loans against mutual funds is their cost.
• Since these are secured loans (backed by your pledged units), interest rates are usually in the range of 8–10%, much lower than the 12–18% charged on unsecured personal loans or credit card debt.
• Interest rates also depend on whether you pledge debt funds or equity funds, with debt fund loans often being slightly cheaper.

5. Your Investments Continue to Earn Returns

• When you pledge mutual fund units, you don’t redeem them. They stay invested in the market, and you continue to earn returns as usual.
• The bank only has the right to sell your units if you fail to repay the loan. Until then, your wealth keeps growing, and your long-term financial goals remain on track. This makes loans against mutual funds a smarter choice compared to redeeming them during emergencies.

6. Easy Online Process with Overdraft Facility

• Many banks and NBFCs have simplified the process of availing this loan. You can now pledge your mutual fund units online and get an overdraft facility directly in your bank account.
• An overdraft gives you flexibility — you can withdraw funds as needed, up to the sanctioned limit, and interest is charged only on the amount you actually use. For example, if your overdraft limit is ₹2 lakh but you use only ₹50,000, you pay interest only on that ₹50,000.

Final Thoughts

A loan against mutual funds is a practical solution for short-term financial needs. It is cheaper than personal loans and allows your investments to continue compounding in the market.

However, it’s important to compare it with other secured loan options like loans against gold or fixed deposits, which sometimes come with even lower interest rates. Always evaluate your repayment capacity before opting for any loan, as defaulting could result in losing your pledged investments.