Loan Against Mutual Funds

Financial obligations do not always wait for your cash flows to arrive. A situation may arise where you need cash, but don't want to sell your mutual funds. A loan against mutual funds (LAMF) can help bridge temporary cash flow gaps.

With LAMF, you can borrow money by pledging your mutual funds(MF) and keep the investment intact. In 2026, the RBI increased the amount investors can borrow against mutual fund holdings, making this option more attractive than before.

Let’s understand this in detail.

What Is a Loan Against Mutual Funds

A loan against mutual funds (LAMF) is a provision by which you borrow money using your mutual fund units as collateral. You don't sell the units. The lender does not take ownership of the units. Instead, it places a lien on them until the loan is repaid. You still own the units and their value keeps changing as per the movement of the underlying investment. You can't sell or redeem those units until you repay the loan.

Most lenders give this as an overdraft (OD). This means you only pay interest on the money you actually use, not on your full approved limit.

Example: you pledge mutual funds worth ₹10 lakh and get an overdraft of ₹6 lakh on it. This ₹6 lakh doesn't get credited to your account. It stays in a separate account and you are not charged any interest as long as the funds are not transferred from their. Now say you need ₹4 lakh. You just transfer this ₹4 lakh from the OD account to your bank account. Interest will be charged on ₹4 lakh for the time period you are using it.

It is advisable to use this facility judiciously. A loan against mutual funds should not be used for discretionary spending or long-term borrowing. If the loan remains outstanding for a long period, the interest cost may outweigh the benefits of staying invested.

RBI's 2026 Update: What Changed and Why

On February 13, 2026, the RBI released a new set of rules for banks and small finance banks governing loans against mutual funds, shares, and other securities. These rules came into effect on April 1, 2026.

Before this, debt MFs had no fixed borrowing limit set by the RBI. Each lender decided this on its own. The new rule brings uniformity to the entire borrowing process. It sets a clear limit for every type of fund to make sure the rule is the same across all banks and NBFCs.

There is one more change you should take note of. The RBI has also set a cap of ₹1 crore per person for all loans against securities, added up across every bank in the country. This cap was meant to take effect from April 1, 2026, but the RBI pushed it to July 1, 2026, after banks asked for more time. This matters if you are borrowing close to or above ₹1 crore in total across different lenders.

Also Read - Loans That Do Not Require a Cibil Score

How Much More Can You Borrow Now?

Here is the new borrowing limit for each type of fund or security, as a percentage of its value:

For instance, if your equity MF units are worth ₹10 lakh, you could borrow up to ₹7.5 lakh against them at an LTV ratio of 75%.

The Tax Angle

If you have big gains on your mutual funds, this matters too. Selling equity Ms held for more than a year now means paying 12.5% tax on gains above ₹1.25 lakh. Pledging instead of selling avoids this tax completely.

How It Works: Pledging Your Units

If your MF units are in demat form, you pledge them through the depositories, i.e. NSDL or CDSL. If they are in non-demat or physical form, the lender works with CAMS or KFintech, the registrars that manage MF records, to place the lien. Once the lien is set, the lender opens a loan account for you, usually an overdraft. You can then withdraw money as you need it and repay it on your own schedule.

Can Businesses Apply for This Loan?

Companies, sole proprietorships, trusts, partnership firms, LLPs and HUFs can avail of this loan. A business can pledge mutual funds held in its name to raise working capital without touching its investments. This is useful for quick cash needs like paying suppliers or covering a temporary gap in cash flow

Also Read - How to Check CIBIL Score for Free

Who Can Apply: Eligibility Rules

For individuals,

• Borrowers must be at least 18 years old.
• You must hold the mutual fund units in your own name, or jointly with someone else.
• The fund you want to pledge also needs to be on the lender's approved list.

Some lenders want a minimum portfolio value of around ₹50,000.

Important note: ELSS or tax-saver funds cannot be pledged while they are still in their three-year lock-in period. Once that lock-in ends, they become eligible like any other equity fund.

What It Costs: Interest Rates and Fees

As of June 2026, interest rates are between 9% and 13% per year for equity funds, and a bit lower for debt funds. Borrowers also have to pay a processing fee. It is generally between 0.25% and 1% of the loan amount. Sometimes, lenders also charge a flat fee instead. The foreclosure or part payment of this loan is generally hassle-free.

How Your Credit Score Affects a Loan Against Mutual Funds

One advantage of a loan against MFs is that borrowers with low a CIBIL score (credit score) can also avail of this funding. As the loan is secured by the MF units being pledged, lenders generally focus on the collateral value in addition to the applicant's credit profile. This can make approval easier than for unsecured loans. However, lender-specific eligibility criteria still apply.

Loan Against Mutual Funds vs Personal Loan

Risks You Should Know About

• While these loans can provide quick access to funds, they also come with certain restrictions and obligations.
• Your loan limit can go down if the market falls. Since the value of mutual fund units changes every day, the amount you can borrow may also change.
• If the value of your pledged units drops significantly, the lender may ask you to either pledge more units or repay a part of the loan.
• You have limited time to arrange for alternate funding. Most lenders give around 7-10 working days to restore the required margin.
• If the shortfall is not addressed within the given period, some of your pledged mutual fund units may be sold to recover the outstanding amount.
• You may miss investment opportunities. If your investments are marked with a lien, you cannot sell them to buy other lucrative investments.

Understanding these risks beforehand can help you make a more informed decision.

How to Apply

1. Check which funds qualify - Not every mutual fund scheme is accepted, so check the lender's approved list first.
2. Complete your KYC - This is usually done online using your PAN and Aadhaar.
3. Pick the units to pledge - Choose the number of units and the MF scheme you want to pledge.
4. Lien marking - The lender works with NSDL, CDSL, CAMS, or KFintech to place the lien on your chosen units.
5. Get your loan limit - Once the lien is confirmed, your loan account opens with a fixed credit limit.
6. Withdraw and repay - Take out money as you need it. Interest is charged only on what you use.

Frequently Asked Questions

Do I still get dividends on pledged mutual funds?

Yes. You still own the units, so any dividends or payouts come to you as usual.

Can a company or business take this loan?

Yes. Companies, partnership firms, LLPs, trusts, and HUFs can all apply, not just individuals.

Can an NRI apply for this loan?

Yes, but it depends on the lender. Not all banks offer this to NRIs, so check directly with the bank.

What happens if I miss a margin call?

The lender can sell some of your pledged units to recover the shortfall.

Can I pledge ELSS funds?

Not while they are in the three-year lock-in period. After that, they are treated like any other equity fund.

Does the new RBI rule mean I can borrow more starting now?

For debt funds, yes, since the limit is now clearly fixed and higher. The new 1 crore rupee cap on total borrowing only matters for very large borrowers, and it starts from July 2026, not April.