What is a Loan against Mutual Funds?
- They don’t want to interrupt compounding.
- They want to avoid redeeming their investments.
- They believe their investments will generate higher returns than the loan interest rate.
- The process is quick and convenient.
Terms and Conditions of a Loan against Mutual Funds
Before considering a loan against mutual funds, investors should understand a few important conditions.
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Loan-to-Value (LTV) Ratio
Banks and NBFCs do not lend against the full value of your mutual fund portfolio.Typically:
- Equity Mutual Funds: Up to 50% of the portfolio value
- Debt Mutual Funds: Higher limits, depending on the lender and scheme
The percentage of loan offered against your investments is known as the Loan-to-Value (LTV) ratio.
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Not All Mutual Funds Are Eligible
This is one of the most overlooked aspects of a loan against mutual funds.
Lenders maintain a list of approved schemes.
Certain mutual funds like ELSS and Sectoral/Thematic funds do not qualify due to:
- Higher volatility
- Lower liquidity
- Internal lending policies
As a result, your entire portfolio may not be considered while calculating loan eligibility.
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Margin Requirements
The lender continuously monitors the value of your pledged investments.
If the value of your portfolio falls significantly, you may receive a margin call requiring you to:
- Deposit additional money
- Pledge additional securities
- Repay a portion of the loan
Failure to comply may result in the lender selling your investments.
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Restrictions on Redeeming Units
Once mutual funds are pledged, you cannot freely redeem or switch those units until the loan is repaid and the lien is removed.
How Much Loan Can You Actually Get?
Many investors assume that if they have a Rs50 lakh mutual fund portfolio, they can borrow Rs30 lakh or even more.
In reality, loan eligibility may be much lower.
Example 1: Standard Eligibility
Suppose Mr Raj has a mutual fund portfolio worth Rs50 lakh.
He requires a loan of Rs30 lakh.
Assuming the lender offers a Loan-to-Value ratio of 50% on eligible equity mutual funds:
- Portfolio Value = Rs50 lakh
- Eligible Loan = Rs25 lakh
Even though Raj needs Rs30 lakh, he will be eligible for only Rs25 lakh.
He will need to arrange the remaining Rs5 lakh from another source.
Example 2: When Some Funds Are Not Eligible
Now suppose Raj’s portfolio consists of:
- Eligible Mutual Funds = Rs40 lakh
- Ineligible Mutual Funds = Rs10 lakh
Since the lender considers only the eligible portion:
- Eligible Portfolio = Rs40 lakh
- Loan-to-Value Ratio = 50%
Maximum Loan Eligibility:
Rs40 lakh × 50% = Rs20 lakh
Although Raj’s total portfolio value is Rs50 lakh, he may receive a loan of only Rs20 lakh.
This is why investors should always verify scheme eligibility before relying on a loan against mutual funds.
Why Loan against Mutual Funds Can Be Risky
While a Loan against Mutual Funds may seem like an attractive way to access liquidity without disturbing your investments, there are several risks that investors often overlook.
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It Can Hurt Your Wealth More Than Selling Funds
Many investors believe that by pledging their mutual funds instead of redeeming them, they are protecting their wealth.
In reality, they are replacing an asset with a liability.
Let’s assume you take a loan of Rs30 lakh at an interest rate of 12% per annum for three years.
At the end of the tenure, your total repayment could be approximately Rs40.8 lakh, depending on the repayment structure.
This means that to access Rs30 lakh today, you may ultimately part with over Rs40 lakh.
Additionally, lenders may charge:
- Processing fees
- Documentation charges
- Penal interest for delayed payments
- Other administrative charges
These costs further increase the overall burden of the loan.
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The “Uninterrupted Return” Myth
One of the biggest reasons investors choose a loan over redemption is the belief that their mutual funds will continue generating superior returns.
The logic usually goes like this:
“Why should I sell my mutual funds when they are generating 12%-15% returns?”
The problem is that mutual fund returns are market-linked.
Past performance does not guarantee future returns.
Your investment may generate lower returns than expected, remain flat for years, or even decline in value.
However, the loan interest continues to accrue regardless of market performance.
You are effectively accepting a guaranteed cost in exchange for an uncertain return.
Moreover, redeeming mutual funds doesn’t mean giving up on future wealth creation.
Once your financial situation improves, you can always restart investing through SIPs and continue building wealth over the long term.
Let’s understand this with two examples.
Case 1: Investment Returns are Lower than the Loan Interest
Suppose you take a Loan Against Mutual Funds of ₹20 lakh for 3 years at 10% interest.
- Interest paid over 3 years: Around ₹6 lakh (excluding processing charges and other fees).
Now assume your investment portfolio delivers the following returns:
- Year 1: 8%
- Year 2: 9%
- Year 3: 10%
At the end of 3 years, your ₹20 lakh investment grows to approximately ₹25.89 lakh, giving you a gain of about ₹5.89 lakh.
However, you have already paid around ₹6 lakh as interest on the loan.
Result: Even though your investments generated positive returns every year, they were not enough to beat the total borrowing cost.
Case 2: Investment Returns are Higher than the Loan Interest
Now assume the same loan, but your investment portfolio earns:
- Year 1: 10%
- Year 2: 11%
- Year 3: 12%
At the end of 3 years, your ₹20 lakh investment grows to approximately ₹27.35 lakh, generating a gain of about ₹7.35 lakh.
After paying around ₹6 lakh as interest, you are still left with a net gain of ₹1.35 lakh.
Result: Here, your investment portfolio has consistently outperformed the borrowing cost.
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You Are Locked In
When mutual funds are pledged, they become inaccessible.
You cannot freely redeem, switch, or use those investments for other financial purposes until the loan is repaid.
This reduces flexibility and can become problematic if your financial circumstances change.
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Risk of Margin Calls
This is one of the most dangerous and least understood aspects of a loan against mutual funds.
When markets decline, the value of your pledged investments also falls.
If the value falls below the lender’s required threshold, the lender may issue a margin call.
You may be required to:
- Deposit additional money
- Pledge additional investments
- Repay a portion of the loan immediately
If you fail to meet the margin requirement, the lender may liquidate your pledged investments to recover the outstanding loan.
Imagine being forced to sell your investments during a market crash—the exact time when long-term investors should ideally remain invested.
This can permanently damage your wealth creation journey.
Need Professional Guidance?
Every investor’s financial situation is different. Before taking a Loan against Mutual Funds, it’s important to evaluate how it may affect your investment planning, wealth management, retirement planning, and overall financial goals. A professional portfolio review can help you determine whether borrowing against your investments is the right choice or if there is a better alternative.
Then:
Niraj Nanal, Certified Financial Planner, helps individuals and families make informed decisions through personalized financial planning, investment management, and wealth creation strategies. Schedule a consultation today to build a financial plan that protects and grows your wealth.
Frequently Asked Questions About Lifestyle Inflation and Retirement
It can be suitable for short-term liquidity needs, but investors should carefully evaluate interest costs, margin call risks, and their repayment capacity before borrowing.
Most lenders offer up to 50% of the value of eligible equity mutual funds, while debt mutual funds may qualify for a higher loan-to-value ratio.
Yes. Your mutual fund units remain invested and continue to participate in market performance. However, returns are not guaranteed, while loan interest remains payable.
Yes. If you fail to meet a margin call or repay the loan according to the agreement, the lender may liquidate the pledged units to recover the outstanding amount.
Generally, no. Due to lock-in periods and lender policies, ELSS and some sectorial or thematic funds are often ineligible.