Loans Against Mutual Funds (LAMF): Eligibility, Documents, Benefits, Risks, and How it Works?

May 20th 2024
Loans Against Mutual Funds (LAMF)

It is common to face financial emergencies that demand quick access to funds, but tapping into your savings can be complicated if your money is tied up in various investments. Some options may come with penalty charges and cashing in stocks or mutual funds could interfere with your long-term financial plans and potential for wealth growth. 

To address a financial crisis, one option is to consider taking out a loan. You have the choice between secured and unsecured loans. In secured loans, you can utilize mutual funds as collateral. How?

Well, we will discuss everything about Loans Against Mutual Funds (LAMF) in this article today. 

What is Meant by Loan Against Mutual Funds (LAMF)?

Loan against mutual funds or LAMF is a convenient financial solution where you can arrange an overdraft facility using your mutual fund units. This facility allows you to withdraw and repay cash as needed, without any extra charges. Interest is only applicable on the amount utilized and for the duration, the money is utilized. 

How Does Loan Against Mutual Funds Work?

When an individual takes a loan against mutual funds, they need to pledge their mutual fund units as collateral to the lender. These units will be considered as collateral until the loan amount is fully repaid. Despite the mutual funds still earning interest, the borrower is unable to sell them until the loan is completely repaid. 

Borrowers will still earn dividends on their mutual fund units, even if they are being used as collateral for a loan. Once the loan is fully paid off, borrowers can request to have the pledge/lien on the mutual funds released. However, in the event of a loan default, the lender has the right to redeem the pledged mutual fund units and recover the remaining loan amount. 

What is the Latest Eligibility to Apply for a Loan Against Mutual Funds?

Here are the latest eligibility criteria to apply for an Investkraft loan against mutual funds - 

  • The age requirement for obtaining a loan against mutual funds varies depending on the lender, usually falling within the range of 18 to 65 years. It is important to check with different lenders to understand their specific age eligibility criteria before applying for a loan.
  • The minimum investment for your mutual fund's portfolio is 50,000 units, although this amount may vary.
  • The LAMF scheme includes funds that have been approved by specified registrars such as CAMS and Kfintech (RTAs). However, it is worth noting that certain funds, including debt and ELSS funds, are typically excluded from this scheme.
  • Indian residency is a mandatory requirement.

Which Documents Should I Submit to Apply for a Loan Against Mutual Funds?

The documentation required for mutual funds can vary from bank to bank or NBFCs. However, most banks typically request proof of identity, proof of address, proof of employment and documentation confirming ownership of the mutual fund investments. 

Which Things Should You Consider Before Applying for an LAMF?

Here are certain considerations you must be aware of before applying for a loan against mutual funds - 

  • If you have mutual fund holdings, you can obtain a loan based on the value of those holdings up to a certain limit. It is important to consider the terms and conditions of such loans, as well as any potential risks involved in using your mutual fund holdings as collateral for a loan.
  • It is important to note that not all banks are willing to provide loans against all types of mutual funds. Each bank may have its criteria and policies regarding the types of mutual funds they accept as collateral for loans. Therefore, it is crucial to inquire with the specific bank about their lending options and eligibility requirements based on the mutual funds you hold.
  • You can save a lot of money by choosing alternatives like LAMF to personal loans and credit cards for certain financial needs.
  • Once you pledge your mutual fund units, you can continue to earn returns on them. This allows you to make the most of your investments while using the units as collateral for a loan. It is a convenient way to access funds without having to fully liquidate your investments. This strategy can help you meet your financial needs while still benefitting from potential market gains.
  • The maximum amount of loan you can avail of is determined by the lender based on various factors such as your income credit history, debt-to-income ratio etc. It is important to understand the upper limit before applying for a loan to ensure you are within the acceptable range. Exceeding the limit may result in a loan application being declined or a less favourable interest rate.
  • Your current lump sum and SIP investments in mutual funds will continue to remain unaffected. 

Which Type of Mutual Funds Can You Pledge as Collateral for LAMF?

You can apply for a loan against mutual funds by pledging any type of mutual fund such as equity funds, hybrid funds, debt mutual funds and liquid mutual funds. However, not every lender will allow you to apply for a loan against a specific mutual fund. Thus, it becomes very important to read the terms and conditions of the lender before applying for a LAMF. 

Are There Any Advantages of Taking a Loan Against Mutual Funds?

There are several advantages of taking a loan against mutual funds and the same have been discussed in this section - 

  • Loans against mutual funds typically offer lower interest rates compared to personal loans because they are secured by mutual funds. This security allows lenders to offer lower interest rates than unsecured loans, making it a cost-effective option for borrowers
  • Investors have the option to obtain loans against their mutual funds without having to redeem the plan. The units can be pledged as collateral for the loans, without being sold, enabling investors to secure loans without giving up ownership. In times of financial constraints, it is advisable to consider taking out a loan against assets, such as apartments, rather than selling them
  • Pledging fund units can provide a quick source of cash, especially during financial emergencies. The online process of pledging units and receiving money directly into your account can be extremely convenient. Since you are already an investor, the loan application process is usually streamlined with minimal documentation and eligibility criteria
  • Taking loans against mutual funds can be advantageous for short-term financial needs, allowing you to borrow money against your investment fund units and repay it gradually without losing ownership of the fund. This provides a convenient solution for raising cash when required, without compromising on your investment scheme
  • Interest will only be charged on the amount that is used from the investment plan, rather than the full loan amount that was initially promised. This means that the interest will be applied to the amount credited or overdraft from the current account

Comparing Loan Against Mutual Funds with Other Options

Before jumping into a loan against mutual funds, it is crucial to carefully consider it alongside other potential options. Here is a detailed comparison of LAMF with several popular alternatives to help you make an informed decision. 

1. Personal Loan

  • Similarities: Both options offer financial support without causing any interference to your existing investments.
  • Differences:
    • Interest Rates: LAMFs offer lower interest rates because they use collateral, such as mutual fund units. In contrast, personal loans are unsecured, resulting in higher interest rates 
    • Eligibility: LAMF eligibility primarily depends on the value of your mutual funds and the criteria set by the lender. In contrast, personal loans prioritize credit scores and income. Individuals with lower credit scores may find it easier to LAMFs 
    • Paperwork: LAMFs typically involve less paperwork than personal loans

2. Loan Against Fixed Deposit (LAFD)

  • Similarities: Both are secured loans using investments as collateral.
  • Differences:
    • Risk: Mutual funds come with the risk of fluctuating value, which can lead to a margin call in LAMF. On the other hand, fixed deposits provide a guaranteed return, thereby minimizing the risk in LAFD 
    • Interest Rates: LAMFs generally offer lower interest rates compared to LAFDs, making them an attractive option for borrowers looking to minimize their interest expenses. This can be beneficial for individuals or businesses seeking to save on borrowing costs and reduce overall financial liabilities
    • Liquidity: Fixed deposits tie up your funds for a set period, limiting your ability to access your money compared to LAMFs, which will allow you to invest new funds without restrictions, providing greater liquidity

3. Credit Card

  • Similarities: Both offer quick access to funds.
  • Differences:
    • Interest Rates: Credit cards are known for their exorbitant interest rates, often much higher than those of traditional loans like LAMFs. This can be a major issue for consumers who carry a balance on their credit cards, as the high interest charges can quickly add up and make it difficult to pay off the debt. 
    • Suitability: Credit cards are designed for short-term expenses, such as everyday purchases. On the other hand, loans and more specifically larger amounts of loans like LAMFs are more appropriate for bigger financial needs. It is important to note that using credit cards for significant purchases can potentially lead to being burdened with high-interest debts

4. Dipping into Emergency Fund

  • Advantages: By avoiding interest charges and potential risks, you can save money and reduce financial uncertainty
  • Disadvantages: Reducing your financial safety net for true emergencies can leave you vulnerable to unexpected expenses. It is important to consider the potential downsides before making decisions that could impact your financial security

Key Considerations Before Opting for a Loan Against Mutual Funds

Here are some key considerations before opting for a Loan Against Mutual Funds (LAMF) - 

  • Market Volatility: The main risk of market volatility is the potential decline in the value of mutual funds, which could lead to a requirement for additional units to maintain the loan-to-value ratio set by the lender. In a worst-case scenario, if the value falls significantly, the lender may sell your holdings to recover their dues.
  • Impact on Investment Growth: The pledged mutual fund units, being unavailable for further growth due to outstanding loans, can significantly impact your overall investment returns. It is important to consider this factor when making investment decisions, as it can affect the potential growth and performance of your portfolio.
  • Interest Rates and Charges: It is crucial to compare interest rates and any additional charges when considering LAMFs. Although the interest rates for these loans are generally lower when compared to unsecured loans, they still involve interest charges. It is equally important to examine fees such as processing charges or prepayment penalties from various lenders.
  • Loan Eligibility: When it comes to LAMFs, it is important to note that not all mutual funds are eligible for this type of loan. Therefore, it is necessary to confirm with your lender the specific schemes that they accept as collateral for LAMFs. It is always best to be fully informed about the eligibility criteria before proceeding with the loan application.
  • Loan Amount: The loan amount you can avail of depends on the Net Asset value (NAV) of your pledged mutual fund units. Typically, lenders offer a percentage of the NAV as the loan amount, ranging from 50% to 70%.
  • Loan Tenure: When deciding on a loan tenure, it is important to weigh the pros and cons. Shorter terms result in higher monthly payments but less interest over time, while longer terms mean lower monthly payments but more interest paid overall. It is essential to carefully consider your financial situation and long-term goals to make the best decision for your loan tenure.


In conclusion, it can be challenging to navigate financial emergencies while preserving long-term investment strategies. However, exploring options like loans against mutual funds (LAMF) can be a strategic solution as it allows for leveraging mutual fund units as collateral, providing quick access to funds without compromising on investment potential.

Frequently Asked Questions (FAQs)


Q: How much money can I borrow with a Loan Against Mutual Funds?

A: The maximum loan amount you can qualify for depends on the lender and type of mutual funds you have. Lenders usually offer an LTV between 50% to 80%, meaning you can borrow 50% to 80% of the net asset value of your mutual funds.

Q: Is a Loan Against Mutual Funds right for me?

A: A LAMF can provide short-term cash without selling investments but it is crucial to assess your financial situation and risk tolerance beforehand. Factors such as investment goals and potential impact on your overall financial plan must be considered. Consulting a financial advisor can help in deciding if LAMF is suitable for your needs

Q: What types of mutual funds are eligible for a Loan Against Mutual Funds?

A: Different lenders have varying criteria for accepting mutual funds as collateral for loans against mutual funds. Typically, equity and debt mutual funds with a strong performance history and high liquidity are preferred, while sector-specific funds, thematic funds and illiquid funds may not be accepted. It is advisable to consult your lender to understand their specific requirements for mutual fund eligibility as collateral

Q: What happens if I default on a Loan Against Mutual Funds?

A: Defaulting on your LAMF by missing loan payments could have severe consequences. The lender may sell your pledged mutual funds to recoup their losses, potentially impacting your long-term investment goals. Moreover, a loan default can damage your credit score, making it harder to secure future loans

Q: Can I use a Loan Against Mutual Funds for any purpose?

A: It is essential to be mindful of the fact that a LAMF is a secured loan and to avoid using the proceeds for frivolous spending or high-risk investments. It is advisable to utilize the loan for essential expenses or emergencies, especially if selling your investments would be less desirable in those situations

Q: Are there any tax benefits to using a Loan Against Mutual Funds?

A: The tax implications of a LAMF are based on your circumstances. The loan’s interest may be tax-deductible, but it is important to consult with a tax advisor to understand the impact on your taxes


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