Loan Against Mutual Funds, Explained Simply

You choose which units to pledge. The lender, a bank or NBFC, marks a lien on those units through the registrar. That means you still own them and they stay invested, but you cannot redeem or switch them until the loan is repaid and the lien is removed.

Our page on CAMS and KFintech explains the registrars that record liens.

Lenders lend only a portion of the current value of your units, called the loan-to-value. Because equity funds swing more, lenders usually lend a smaller share against them than against debt funds. The exact limits depend on the lender and the type of fund.

Many lenders offer the loan as an overdraft or credit line. You get a limit and pay interest only on the amount you actually use, for the days you use it. Others offer a regular loan with fixed repayments. Overdrafts can be flexible for short-term needs.

Several banks and lenders now offer fully online applications. You verify your folios, choose units to pledge, approve the lien with an OTP, and the money can arrive quickly. Use only regulated banks and NBFCs, through official apps and websites.

• Your long-term investments stay intact.
• You avoid selling in a falling market.
• You may avoid triggering capital gains tax for now.
• Interest is often lower than unsecured personal loans or credit cards.

Because the loan is backed by your units, lenders usually charge less than for unsecured personal loans, and approval can be faster. But a personal loan does not put your investments at risk if markets fall.

Our page on good debt versus bad debt explains how to think about borrowing.

Credit card balances carried over are usually very expensive. For a short-term need you cannot pay off quickly, a loan against funds is often much cheaper. Our post on clearing credit card debt explains why card debt is so costly.

If your fund values fall, your loan becomes a bigger share of the pledged value. The lender may ask you to repay part of the loan or pledge more units, quickly. If you cannot, the lender can redeem your units to recover the money, possibly at a low point.

This is the main risk, especially with equity funds in volatile markets. Our page on risk and volatility explains why values can swing.

Your pledged units keep moving with the market. If they grow, you benefit. But you pay interest on the loan regardless. If the fund grows less than the loan costs, borrowing was more expensive than selling would have been.

Pledged units cannot be redeemed, but your SIPs can usually continue in the same folio. New units bought after the pledge are generally not part of the lien unless you pledge them too. Check with your lender.

• A short-term need you can repay within months.
• Bridging a gap, like a property payment before a sale completes.
• A business cash flow gap with clear repayment.
• When markets are weak and selling would lock in losses.

• Borrowing for spending you cannot repay.
• Borrowing to invest more in the market.
• Long-term loans that slowly grow unpaid.
• Pledging your retirement or children education money for non-essential costs.

A loan against funds is useful, but an emergency fund avoids borrowing at all. Keep a few months of expenses in a liquid fund or savings account for surprises.

Our page on building an emergency fund explains how.

Once you repay, ask the lender to release the lien. The registrar removes it, and your units become free to redeem or switch again. Check your account statement to confirm the lien is gone.

Our page on how to track your portfolio explains where to check.

Suppose a family needs money for a few months to pay for a property registration while waiting for an old deposit to mature. Selling their equity funds would mean selling during a weak market. Instead, they pledge some debt fund units, take a modest overdraft, and repay it when the deposit matures. Their equity funds stay invested throughout. This is an illustration, not a recommendation.

• How much can I borrow against equity and debt funds?
• Is it an overdraft or a fixed loan?
• What are the processing fees and charges?
• What happens if fund values fall, and how quickly must I respond?
• How long does it take to release the lien after repayment?

Some people pledge funds to borrow money and invest even more in the market. That magnifies both gains and losses, and a market fall can trigger margin calls at the worst moment. For most families, borrowing to invest is a risk not worth taking.

Borrow less than the maximum offered. That leaves room if markets fall, so you are less likely to face a margin call at a bad moment.

• Pledge units, borrow a part of their value.
• Units stay invested but cannot be sold.
• Often cheaper than personal loans or cards.
• Watch for margin calls if markets fall.

We are distributors rather than investment advisers and we recommend no schemes. If you are considering a loan against your funds and want to understand the impact on your plan, get in touch.